GEN 009/The Entrepreneurial Mind for BSA

(converted to Intermediate Accounting)

Student Activity Sheets Module #2
Name :MABAO, REZY PABLIO Class number:__________ Section :A- BSA-05 Schedule: THURSDAY
Date: JULY 30, 2021
Lesson Title: Investment in Debt Securities Student Activity Sheets, Pen, Basic
Lesson Objectives: calculator, Intermediate Accounting 1A
At the end of this module, I should be able to: 1. textbook
Account for Sale of Bonds prior to maturity.
2. Explain the treatment of financial assets References:
mesured at OCI (mandatory) Millan, Z. B, Intermediate Accounting 1A
Materials:

Productivity Tip: Even the greatest was once a beginner. Don’t be afraid to take that first
step. Close your eyes, meditate for 1-3 minutes and you may start reading this module.

A. LESSON PREVIEW/REVIEW
1. Introduction

Good day, future accountant! Welcome back to learning the General elective converted Intermediate
Accounting. The immediately preceding module presented the orientation about the Flexible Learning
setup by PHINMA Education in the new Normal. As a continuation, this module introduces the
Investment in Debt Securities.

2. Activity 1: What I know Chart, part 1

Try answering the questions below by writing your ideas under the first column What I Know. It’s
okay if you write key words or phrase that you think related to the questions.
What I know Questions What I learned

It less carrying amount of the 1.How do you recognized the It will recognized as gain or
bonds then adjusted for any difference between the net loss in profit or loss.
disposal proceeds and the
discount or premium
carrying amount of the
amortization up to the date of bonds?
sales.

By discounting the future cash 2.How does the purchase By discounting the future cash
flow using the current rate. price of a bond can be flow by the current rate.
estimated??

Is mandatory for certain debt 3.What is the treatment of For

instrument assets unless the financial assets measured at debt instruments the FVTOCI c
OCI (mandatory)?
option is FVTPI is elected. lassification is mandatory for
certain assets unless the fair
value option is elected.

This document and the information thereon is the property of PHINMA Education.] 1
 GEN 009/The Entrepreneurial Mind for BSA
(converted to Intermediate Accounting)
Student Activity Sheets Module #2

Name:_________________________________________________________ Class number:__________

Section:_______________ Schedule:_________________________________ Date:_________________
B. MAIN LESSON
1) Activity 2: Content Notes

Sale of bonds prior to maturity

• Net Disposal proceeds less Carrying amount of the bonds (adjusted for any Discount or
premium amortization up to the date of sale) is recognized as gain or loss in profit or loss. • If
sold between scheduled interest payment dates, the sale normally includes accrued interest.
The accrued interest is recognized as interest income and not included in the gain or loss on the
sale. The difference between the net disposal proceeds after deducting the accrued interest and
the updated carrying amount represents the gain or loss on the sale. • Gains and losses on
derecognition of financial assets measured at amortized cost are presented separately on the
face of the statement of comprehensive income.

Illustration 1
On Jan 1, 20x1, HYBE Co. acquired P1,000,000 face amount, 10% bonds of Big Hit, Inc for P951,963. The
principal is due on January 1, 20x4 but interest is due annually every Jan 1. The yield rate on the bonds is
12%. HYBE Co. classified the bonds as amortized cost financial asset.

Case1: Sale on Interest payment date

On Jan 1, 20x3, HYBE Co. sold all the bonds at 110. HYBE Co incurred transaction costs of P10,000 on the
sale. Compute for the gain (loss) on the sale.

Solution:
Date Interest Received Interest Income Amortization Present Value

Jan 1, 20x1 951,963

Jan 1, 20x2 100,000 114,236 14,236 966,199

Jan 1, 20x3 100,000 115,944 15,944 982,143

Jan 1, 20x4 100,000 117,857 17,857 1,000,000

Sale Price (1M x 10%) 1,100,000

Transaction costs (10,000)
Net Disposal proceeds 1,090,000
Carrying amount on the date of sale (see table) (982,143)
Gain on Sale 107,857

Jan 1, 20x3 Cash [(1M x 110%) – 10K] 1,090,000

Investment in Bonds at amortized cost 982,143
Gain on sale (squeeze) 107,857

Case 2: Partial sale on interest payment date

On Jan 1, 20x3, HYBE Co. sold half of the bonds at 110. HYBE Co incurred transaction costs of P10,000 on
the sale. Compute for the gain (loss) on the sale
Solution

Jan 1, 20x3 Cash [(1M x ½ x 110%) – 10K] 540,000 Investment in Bonds at amortized cost (982,143 x
 ½) 491,072 Gain on sale (squeeze) 48,928

This document and the information thereon is the property of PHINMA Education.] 2

GEN 009/The Entrepreneurial Mind for BSA

(converted to Intermediate Accounting)
Student Activity Sheets Module #2
Name:_________________________________________________________ Class number:__________
Section:_______________ Schedule:_________________________________ Date:_________________
Cas 3: Sale in between interest payment dates
On July 1, 20x3, HYBE Co. sold all the bonds at 112. HYBE Co incurred transaction costs of P10,000 on the
sales. Compute for the gain (loss) on the sale.

Solution:
Date Interest Received Interest Income Amortization Present Value

Jan 1, 20x1 951,963

Dec 31, 20x1 100,000 114,236 14,236 966,199

Dec 31, 20x2 100,000 115,944 15,944 982,143

July1, 20x3 50,000* 58,929** 8,929 991,072

*(100,000 x 10% x 6/12) = 50,000; **(982,143 x 12% x 6/12) = 58,929

Sale Price including accrued interest (1M x 112%) 1,120,000 Accrued interest (see table)
(50,000) Sale price excluding accrued interest 1,070,000 Transaction costs (10,000) Net disposal
proceeds 1,060,000 Carrying amount on date of sale (see table) (991,072) Gain on Sale 68,928

Purchase Price of Bonds

• The purchase price of a bond can be estimated by discounting the future cash flow using the current
rate.
• Computation of purchase price: Term bonds acquired on the interest date
o PV of Principal (PV of 1 using effective rate x Principal) xx
PV of interest payment (PV of ord. annuity x Principal x Nom. Rate) xx
Purchase price or present value of the bonds xx
• Term bonds: Acquired in Between Interest dates.
o Steps:
▪ 1. Compute for the present value of the bonds on the last interest date (or the date of
the bonds)
▪ 2. To get the present value – date of acquisition, add the bond discount amortization (or
deduct premium amortization) from the last interest date until the date of
acquisition.
▪ 3. To get the total purchase price, add the nominal interest from the last interest date
until the date of acquisition to the present value-date of acquisition.
▪ The complete formula:
PV of Principal (PV of 1 using effective interest rate x Principal) xx Add: PV of
interest payments (PV of ordinary annuity x Principal x
Nominal rate) xx
Present value of the bonds – last interest date xx Add: Discount amortization (or
deduct premium amortization)
From the last interest date to date of acquisition xx
Present value – date of acquisition xx Add: Nominal Interest (from the last interest
 date to date of acquisition) xx Total Purchase Price xx
o Interest Income shall be computed using effective amortization into consideration the
number of months outstanding during the year.
This document and the information thereon is the property of PHINMA Education.] 3

GEN 009/The Entrepreneurial Mind for BSA

(converted to Intermediate Accounting)
Student Activity Sheets Module #2
Name:_________________________________________________________ Class number:__________
Section:_______________ Schedule:_________________________________ Date:_________________
• Serial bonds – are bonds that mature in installments. Therefore, the periodic collection includes not
only interest but also portion of the principal. Computation of the present value of serial bonds:
Years Principal Interest Total PV of 1 Total
collections collections Collections (d) Present
(a) (b) (c=a + b) Value
(e= c x d)

End of year 1 XX XX XX XX XX

End of year 2 XX XX XX XX XX

End of year n XX XX XX XX XX

Purchase price of serial bonds XX

• Zero-coupon Bonds are bonds that do not pay periodic interests. Both principal and interest are due
only at maturity date.
• Callable Bonds are bonds that the issuer can redeem prior to maturity. When amortizing callable
bonds, the amortization period (“n”) may not be for the whole term because the issuer can redeem
the bonds prior to maturity. Subsequent changes are treated as changes in accounting estimate and
accounted for prospectively.
• Fair value through other comprehensive income—financial assets are classified and measured at
fair value through other comprehensive income if they are held in a business model whose
objective is achieved by both collecting contractual cash flows and selling financial assets.
• The FVTOCI classification is mandatory for certain debt instrument assets unless the option to FVTPL
(‘the fair value option’) is taken. Whilst for equity investments, the FVTOCI classification is an election.
The requirements for reclassifying gains or losses recognized in other comprehensive income (OCI)
are different for debt and equity investments. For debt instruments measured at FVTOCI, interest
income (calculated using the effective interest rate method), foreign currency gains or losses and
impairment gains or losses are recognized directly in profit or loss. The difference between cumulative
fair value gains or losses and the cumulative amounts recognized in profit or loss is recognized in OCI
until derecognition, when the amounts in OCI are reclassified to profit or loss.

2) Activity 3: Skill Building Activity

TRUE OR FALSE. Before each number, write TRUE, if the statement is correct, and False if it is
incorrect.

FALSE- INCREASE1. The amortized cost of an investment in term bonds that is acquired at a
discount decreases each year.
TRUE 2. Whether an investment in debt securities is measured at amortized cost or FVOCI, the
 total effect of the investment in profit or loss would be the same.

FALSE- SAME AMOUNT OF INTEREST INCOME 3.) Entity B acquired bonds at a discount and
classified them as FVOCI. The amount of interest income for the period would be higher if the
bonds were classified as amortized cost asset.

. FALSE – Interest income on debt-type FVOCI assets is calculated using the effective
interest method 4. Discount or premium amortization is unnecessary if investments in bonds
are measured at FVOCI.

TRUE 5. Entity C acquired bonds and classified them as FVOCI. Subsequently, the bonds were
sold at P100. The bonds were reported at fair value of P90 in the latest annual financial
statements. The bonds have an amortized cost of P80 as at the date of sale. Entity C would
probably recognize a gain of P20 in profit or loss at the date of sale.

This document and the information thereon is the property of PHINMA Education.] 4

GEN 009/The Entrepreneurial Mind for BSA

(converted to Intermediate Accounting)
Student Activity Sheets Module #2
Name:_________________________________________________________ Class number:__________
Section:_______________ Schedule:_________________________________ Date:_________________

Multiple Choice. Choose the best answer. Write your answer before the number.

B1. Securities classified as financial asset measured at amortized cost are reported
at a. acquisition cost.
b. acquisition cost plus amortization of a discount.
c. acquisition cost plus amortization of a premium.
d. fair value.

C 2. Changes in fair value of an investment measured at fair value through other comprehensive
income a. must be recognized in profit or loss.
b. must be recognized directly in equity.
c. may be recognized in profit or loss or directly in equity.
d. must be recognized in other comprehensive income and accumulated in a separate equity
account.

A3. A debt security is purchased at a discount. The entity wants to classify the investment as a financial
asset measured at FVOCI. The entry to record the amortization of the discount includes a. debit to
investment account.
b. debit to the discount account.
c. debit to Interest Revenue.
d. none of these.

B 4. When an investment in a debt security measured at amortized cost is transferred to held for
trading security, the carrying amount assigned to the held for trading security should be a. its
original cost.
b. its fair value at the date of the transfer.
c. the lower of its original cost or its fair value at the date of the transfer.
d. the higher of its original cost or its fair value at the date of the transfer.

A5. Which category includes only debt securities?

a. Financial assets measured at amortized cost
 b. FVPL assets
c. Held for trading securities
d. FVOCI (election)

3) Activity 4: What I know Chart, part 2

It’s time to answer the questions in the What I know chart in Activity 1. Log in your answer in the third
column.

This document and the information thereon is the property of PHINMA Education.] 5

GEN 009/The Entrepreneurial Mind for BSA

(converted to Intermediate Accounting)
Student Activity Sheets Module #2
Name:_________________________________________________________ Class number:__________
Section:_______________ Schedule:_________________________________ Date:_________________

4) Activity 5: Check for understanding

PROBLEM SOLVING. Use separate paper for your solution. Write your solution in a proper format and
attach it to this SAS after answering.

1. On January 1, 20x1, Dynamite Co. acquired P2,000,000, 12% bonds at 95. Dynamite paid broker’s
commission of P40,510 on the acquisition. Principal is due on December 31, 20x4 but interest is due
annually every December 31. The bonds are measured at amortized cost. What is the effective
interest rate?

. Solution:
Purchase price (2M x 95%) 1,900,000
Commission 40,510
Initial carrying amount 1,940,510

Trial and error:

There is discount. Therefore, the effective interest rate must be higher than the nominal rate of 12%.
First trial: (using 13%)
Future cash flows x PV factor at x% = Present value
➢ (2M x PV of ₱1 @ 13%, n=4) + (2M x 12% x PV of an ordinary annuity of ₱1 @ 13%, n=4) = 1,940,510 ➢
1,226,637 + 713,873 = 1,940,510
➢ 1,940,510 is equal to 1,940,510
❖ The effective interest rate is 13%.

2. Use the fact pattern above. Dynamite Co. sold half of the bonds on Jan 1, 20x4 at 92. Dynamite Co.
incurred broker’s commission of P46,000. How much is the gain (loss) on the sale? Provide the
journal entry.
 . Solution:
Date Interest received Interest income Amortization Present value Jan. 1, 20x1 1,940,510 Dec.
31, 20x1 240,000 252,266 12,266 1,952,776 Dec. 31, 20x2 240,000 253,861 13,861 1,966,637 Dec.
31, 20x3 240,000 255,663 15,663 1,982,300 Dec. 31, 20x4 240,000 257,700 17,700 2,000,000

Sale price (2M x 92% x 1/2) 920,000 Transaction costs (46,000) Net disposal proceeds 874,000
Carrying amount on date of sale (1,982,300 x ½) (991,150) Loss on sale (117,150)

3. Use the fact pattern above but ignore the assumption in the preceding problem. Dynamite Co. sold
all of the bonds on July 1, 20x4 at 92. Dynamite Co. incurred broker’s commission of P82,000. How
much is the gain (loss) on the sale? Provide the journal entry on July 1, 20x4.

Solution:
Date Interest received Interest income Amortization Present value Jan. 1, 20x1 1,940,510 Dec.
31, 20x1 240,000 252,266 12,266 1,952,776 Dec. 31, 20x2 240,000 253,861 13,861 1,966,637 Dec.
31, 20x3 240,000 255,663 15,663 1,982,300 July 1, 20x4 120,000 128,850 8,850 1,991,150

Sale price including accrued interest (2M x 92%) 1,840,000 Accrued interest (see table above)
(120,000) Sale price excluding accrued interest 1,720,000 Transaction costs (82,000) Net disposal
proceeds 1,638,000 Carrying amount on date of sale (see table above) (1,991,150) Loss on sale
(353,150)

4. On January 1, 20x1, On Co. acquired P6,000,000, 10% bonds for P5,800,610. The bonds mature in
three equal annual installments every Dec 31, plus interest on the outstanding principal balance. On
Co. classified the bonds as amortized cost financial asset. The effective interest rate is 12%.
Requirements:
a. Prepare the amortization table
b. Determine the current and noncurrent portion of the investment on December 31, 20x1. 5. On
January 1, 20x1 Film Out Co. acquired P1,000,000, 12% bonds for P1,049,737. The principal is due on
Dec 31, 20x3 but interest is due annually every Dec 31. The effective interest rate is 10%. The bonds
are measured at fair value through other comprehensive income. Information on fair values is as
follows:
December 31, 20x1 102
December 31, 20x2 105

On January 4, 20x3, Neighborhood Co. Sold all the bonds at 104.

Requirement: Provide the journal entries.

C. LESSON WRAP-UP
1) Activity 5: Thinking about Learning
Congratulations for finishing this module! Shade the number of this module that you just have finished.
P1 P2 P3
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 25

Did you have challenges learning the concept in this module? If none, which part of module helped
you learn the concepts? ____________________________________________________________

Assignment:
 Read Investments – Additional Topics (Regular way of purchase or sale of financial assets,
Reclassification and Impairment) in your book.

This document and the information thereon is the property of PHINMA Education.] 6

GEN 009/The Entrepreneurial Mind for BSA

(converted to Intermediate Accounting)
Student Activity Sheets Module #2
Name:_________________________________________________________ Class number:__________
Section:_______________ Schedule:_________________________________ Date:_________________
KEY TO CORRECTIONS

TRUE OR FALSE

1. FALSE - increases
2. TRUE
3. FALSE – same amount of interest income
4. FALSE – Interest income on debt-type FVOCI assets is calculated using the effective interest
method.
5. TRUE – 100 sale price – 80 amortized cost = 20 gain

Multiple Choice

1. B
2. C
3. A
4. B
5. A

CHECK FOR UNDERSTANDING

1. Solution:
Purchase price (2M x 95%) 1,900,000
Commission 40,510
Initial carrying amount 1,940,510

Trial and error:

There is discount. Therefore, the effective interest rate must be higher than the nominal rate of 12%.

First trial: (using 13%)

Future cash flows x PV factor at x% = Present value
➢ (2M x PV of ₱1 @ 13%, n=4) + (2M x 12% x PV of an ordinary annuity of ₱1 @ 13%, n=4) = 1,940,510
➢ 1,226,637 + 713,873 = 1,940,510
➢ 1,940,510 is equal to 1,940,510

❖ The effective interest rate is 13%.

2. Solution:
Date Interest received Interest income Amortization Present value Jan. 1, 20x1 1,940,510 Dec.
31, 20x1 240,000 252,266 12,266 1,952,776 Dec. 31, 20x2 240,000 253,861 13,861 1,966,637 Dec.
31, 20x3 240,000 255,663 15,663 1,982,300 Dec. 31, 20x4 240,000 257,700 17,700 2,000,000

This document and the information thereon is the property of PHINMA Education.] 7
 GEN 009/The Entrepreneurial Mind for BSA
(converted to Intermediate Accounting)
Student Activity Sheets Module #2

Name:_________________________________________________________ Class number:__________

Section:_______________ Schedule:_________________________________ Date:_________________

Sale price (2M x 92% x 1/2) 920,000 Transaction costs (46,000) Net disposal proceeds 874,000 Carrying
amount on date of sale (1,982,300 x ½) (991,150) Loss on sale (117,150)
Jan. Cash [(2M x 92% x 1/2) - 46K] 874,000 991,150
1, Loss on sale (squeeze) 117,150
20x4 Investment in bonds (1,982,300 x ½)

3. Solution:
Date Interest received Interest income Amortization Present value Jan. 1, 20x1 1,940,510 Dec.
31, 20x1 240,000 252,266 12,266 1,952,776 Dec. 31, 20x2 240,000 253,861 13,861 1,966,637 Dec.
31, 20x3 240,000 255,663 15,663 1,982,300 July 1, 20x4 120,000 128,850 8,850 1,991,150

Sale price including accrued interest (2M x 92%) 1,840,000 Accrued interest (see table above)
(120,000) Sale price excluding accrued interest 1,720,000 Transaction costs (82,000) Net disposal
proceeds 1,638,000 Carrying amount on date of sale (see table above) (1,991,150) Loss on sale
(353,150)
July Interest receivable 120,000 128,850
1, Investment in bonds at amortized cost 8,850
20x Interest income
4 to record the discount amortization

July Cash (2M x 92% – 82K) 1,758,000 1,991,150

1, Loss on sale (squeeze) 353,150 120,000
20x Investment in bonds at amortized cost
4 Interest receivable
to record the sale

4. Solution:
Requirement (a):
Date Principal + Interest on outstanding
principal balance Total collections
Dec. 31, 20x1 2,000,000 + (6,000,000 x 10%) 2,600,000
This document and the information thereon is the property of PHINMA Education.] 8

GEN 009/The Entrepreneurial Mind for BSA

(converted to Intermediate Accounting)
Student Activity Sheets Module #2
Name:_________________________________________________________ Class number:__________
Section:_______________ Schedule:_________________________________ Date:_________________
Dec. 31, 20x2 2,000,000 + (4,000,000 x 10%) 2,400,000 Dec. 31, 20x3 2,000,000 + (2,000,000 x
10%) 2,200,000
 Date Collections Interest income Amortization Present value Jan. 1, 20x1 5,800,610 Dec. 31, 20x1
2,600,000 696,073 1,903,927 3,896,683 Dec. 31, 20x2 2,400,000 467,602 1,932,398 1,964,285 Dec.
31, 20x3 2,200,000 235,715 1,964,285 0

Requirement (b):
Current portion of serial bonds 1,932,398
Noncurrent portion of serial bonds 1,964,285
Total carrying amount of serial bonds – Dec. 31, 20x1 3,896,683

5. Solution:
➢ Initial recognition:
Jan. 1, Investment in bonds – FVOCI 1,049,737 1,049,737
20x1 Cash

➢ Subsequent measurement (Dec. 31, 20x1):

Date Intere Interest Amortizatio Present
st income n value
receiv
ed

Jan. 1, 20x1 1,049,73

7

Dec. 31, 20x1 120,000 104,974 15,026 1,034,711

Dec. 31, 20x2 120,000 103,471 16,529 1,018,182

Dec. 31, 20x3 120,000 101,818 18,182 1,000,000

Dec. 31, Cash 120,000 104,974

20x1 Interest income 15,026
Investment in bonds – FVOCI

Dec. 31, Unrealized gain (loss) – OCI* 14,711 14,711

20x1 Investment in bonds – FVOCI

* Fair value - 12/31/x1 (1M x 102%) 1,020,000 Amortized cost - 12/31/x1 (see table above) 1,034,711
Unrealized loss - OCI (14,711)

➢ Subsequent measurement (Dec. 31, 20x2):

Dec. 31, Cash 120,000 103,471
20x2 Interest income 16,529
Investment in bonds – FVOCI

Dec. 31, Investment in bonds – FVOCI 46,529 46,529

20x2 Unrealized gain (loss) – OCI**

** Fair value - 12/31/x2 (1M x 105%) 1,050,000 Amortized cost - 12/31/x2 (see table above) 1,018,182
 Cumulative balance of gain in equity – 12/31/x2 31,818
This document and the information thereon is the property of PHINMA Education.] 9

GEN 009/The Entrepreneurial Mind for BSA

(converted to Intermediate Accounting)
Student Activity Sheets Module #2
Name:_________________________________________________________ Class number:__________
Section:_______________ Schedule:_________________________________ Date:_________________
Less: Cumulative balance of loss in equity – 12/31/x1 (14,711) Unrealized gain - OCI 46,529(a)

(a)
Positive amount minus a negative amount results to addition.

➢ Derecognition
Jan. 4, Unrealized gain (loss) – OCI (a) 10,000 10,000
20x3 Investment in bonds – FVOCI
to recognize the change in fair value

Jan. 4, Cash 1,040,000 1,040,000

20x3 Investment in bonds – FVOCI
to derecognize the investment

Jan. 4, Unrealized gain (loss) – OCI (b) 21,818 21,818

20x3 Gain on sale – P/L (b)
to derecognize the cumulative fair value gains

(a)
[1M x (104% - 105%)] = 10,000
(b)

Net proceeds (1M x 104%) 1,040,000 Amortized cost – 1/1/x3 (see table above) 1,018,182 Cumulative
gain in equity/Reclassification adjustment – 1/4/x3 21,818

The movements in the accounts are analyzed as follows:

Investment in bonds – FVOCI
1/1/x1 1,049,737
15,026 12/31/x1 amortization
14,711 12/31/x1 fair value change
12/31/x1 1,020,000
16,529 12/31/x2 amortization
12/31/x2 fair value change 46,529
12/31/x2 1,050,000
10,000 1/4/x3 fair value change
1,040,000 1/4/x3 derecognition
0

Unrealized gain (loss) - OCI

12/31/x1 Loss in OCI 14,711

12/31/x1 – Loss (Debit bal.) 14,711
46,529 12/31/x2 Gain in OCI
31,818 12/31/x2 – Gain (Credit bal.)
1/4/x3 Loss in OCI 10,000
 Reclassification adj. to P/L 21,818 1/4/x3 derecognition
0

This document and the information thereon is the property of PHINMA Education.] 10