Flexible Learning A.Y.

2021-2022
DISTANCE EDUCATION COURSE GUIDE USING OBTL DESIGN v1

DISCUSSION

We are done with financial assets at fair value. In this Module, we will focus our discussion on
the last type of financial assets, which are financial assets at amortized cost. A very common
example of this type of financial assets is Investment in Bonds.

Before we study this new topic, recall these important concepts on measurement, as it will be
very helpful if you are already familiar with these:

CLASSIFICATION INCLUSION INITIAL MEASUREMENT

Financial assets at fair value through Equity securities
Fair value
profit or loss (FA@FVPL) Debt securities
Financial assets at fair value through
Equity securities Fair value plus transaction
other comprehensive income
Debt securities costs
(FA@FVOCI)
Financial assets at amortized cost Fair value plus transaction
(FA@AC) Debt securities
costs

Remember, the subsequent measurement of FA@AC is at its amortized cost. Meaning, it is not
affected by changes in fair value. Just focus on the computation of amortized cost. How? Find
out in this Module and by reading Chapters 19 and 20 of Valix’s Intermediate Accounting 2019
Volume 1.

Below is a summary of the things that you need to remember:

1. Investment in bonds can be classified as: a.) Financial asset held for trading b.)
Financial asset at amortized cost c.) Financial asset at FVOCI; or d.) Financial asset at
FVPL (by irrevocable designation or by fair value option).
2. It can either be a term bond or a serial bond. Term bonds are bonds having single
maturity date, whereas, serial bonds have series of maturity dates. With regards serial
bonds, take note that principal payments doesn’t need to be of equal amounts and of
regular interval. It totally depends upon the agreement of the issuer (borrower) and the
investor (creditor).
3. The investment can be done on interest date or between interest dates. If it is made
between interest dates, don’t forget to debit the account Interest Income for the number
of months not covered by the investment. Also, remember to adjust the term of the
bonds when investment is made between interest dates.
4. In computing for present value factors, PV of 1 is used for term bonds and serial bonds
having unequal installments or irregular timing of cash flows; while PV of ordinary
annuity for serial bonds having equal, annual installments.

To give more details of each class of investment in bonds, check the images on the next page:

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Investment(in(Bonds(
CLASSIFICATION:(Financial(asset(at(amortized(cost(

! Initial(measurement:(Fair(value((Cost)(
! Transactions(costs:(Added/Included(to(the(cost(
! Subsequent(measurement:(Amortized(cost!
! Amortize(any(premium(or(discount(
" Straight(line(method((term(bonds)(
" Bond(outstanding(method((serial(bonds)(
" Effective(interest(method((term(and(serial(bonds)(
! Journal(entry(upon(recognition(–(on(interest(dates:(
( (Investment(in(bonds(face!value!x!purchase!price) (XX(
( ( (Cash ( ( ( ( ( ( ( ( ( ( (XX(
! Journal(entry(upon(recognition(–(between(interest(dates:(
( (Investment(in(bonds(face!value!x!purchase!price) !XX(
( (Interest(income((face!value!x!nominal!rate)( ( (XX ( ( (
( ( (Cash ( ( ( ( ( ( ( ( ( ( (XX(

Investment(in(Bonds(
CLASSIFICATION:(Financial(asset(at(FVOCI(

! Initial(measurement:(Fair(value(
! Transactions(costs:(Added/Included(to(the(cost(
! Subsequent(measurement:(FVOCI((recognizes+changes+in+FV)+
! Amortize(any(premium(or(discount:(Effective(interest(method(
! Journal(entry(upon(recognition(–(on(interest(dates:(
( (Financial(asset(–(FVOCI(face+value+x+purchase+price) (XX(
( ( (Cash ( ( ( ( ( ( ( ( ( ( (XX(
! Journal(entry(upon(recognition(–(between(interest(dates:(
( (Financial(asset(–(FVOCI(face+value+x+purchase+price)+XX(
( (Interest(income((face+value+x+nominal+rate)( ( (XX ( ( (
( ( (Cash ( ( ( ( ( ( ( ( ( ( (XX(

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Investment(in(Bonds(
CLASSIFICATION:(Financial(asset(at(FVPL(

! Initial(measurement:(Fair(value(
! Transactions(costs:(Expensed(immediately(
! Subsequent(measurement:(FVPL((recognizes+changes+in+FV)+
! Does(not(amortize(any(premium(or(discount(
! Journal(entry(upon(recognition(–(on(interest(dates:(
( (Financial(asset(–(FVPL(face+value+x+purchase+price) (XX(
( (Expenses ( ( ( ( ( ( ( ( (XX(
( ( (Cash ( ( ( ( ( ( ( ( ( ( (XX(
! Journal(entry(upon(recognition(–(between(interest(dates:(
( (Financial(asset(–(FVPL(face+value+x+purchase+price) +XX(
( (Interest(income((face+value+x+nominal+rate)( ( (XX(
( (Expenses ( ( ( ( ( ( ( ( (XX(
( ( (Cash ( ( ( ( ( ( ( ( ( ( (XX(

Don’t get overwhelmed with the concepts and principles underlying investment in bonds. Below
are sample problems which can help you understand this topic better. Solutions are also
provided at the end of this section. Just a tip, be able to identify what are the given financial
assets as these exercises include FA@FVPL and FA@FVOCI. Answer the problems diligently
before looking at the solutions. Furthermore, we will use four decimal places for PV factors,
except when such is given; example, 0.3333 or 1.2555; and we round off final answers to whole
number. As much as possible, recall the necessary journal entries we have discussed.

SAMPLE PROBLEM #1
At the beginning of the current year, Icon Company acquired bonds with face amount of P4,000,000
at a cost of P3,761,000. The bonds are held for trading. Bonds pay interest of 12% semiannually on
January 1 and July 1 and mature on January 1, 2023. The bonds have an effective yield of 14% and
are quoted at 105 at year-end. Prepare journal entries for the current year.

SAMPLE PROBLEM #2
Mature Company carried out the following transactions in bond investments held for trading
during the current year:
Aug. 1 Purchased 5,000, P1,000, 12% bonds of Acme Company at 104 plus accrued interest of
P150,000. The bonds pay interest semiannually on May 1 and November 1.
31 Purchased 2,000, P1,000, 12% bonds of Avco Company at 98 plus accrued interest.
Semiannual payment of interest, June 30 and December 31.
Dec. 1 Sold 2,000 of the Acme bonds at 102 plus accrued interest. Brokerage fee, P160,000.
31 The following quotations were obtained: Acme bonds, 98; Avco bonds, 99.
REQUIRED:
a.) Prepare journal entries to record the transactions.
b.) Carrying amount of the investments on December 31.

SAMPLE PROBLEM #3
On July 1, 2019, Bearish Company purchased as trading investment a P2,000,000 face amount,
8% bond for P2,200,000 plus accrued interest and commission of P50,000. The bond pays
interest annually on December 31. On December 31, 2019, the bond investment was quoted at
95. On March 31, 2020, the entity sold the bond investment for P2,100,000 plus accrued
interest. Prepare journal entries for 2019 and 2020.

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SAMPLE PROBLEM #4
On October 1, 2019, Yost Company purchased 4,000 of the P1,000 face amount, 10% bonds of
Pell Company for P4,400,000 which included accrued interest of P100,000. The bonds, which
mature on January 1, 2026, pay interest semiannually on January 1 and July 1. The entity used
the straight line method of amortization and appropriately recorded bonds as financial asset at
amortized cost. Prepare journal entries for 2019 and 2020.

SAMPLE PROBLEM #5
On January 1, 2019, Flexible Company acquired for P1,150,000 the entire P1,000,000, 12%
bond issue of another entity to be held as financial asset at amortized cost. Bonds of P200,000
mature at annual interval beginning December 31, 2019. Interest is payable semiannually on
June 30 and December 31.
REQUIRED:
a.) Prepare a schedule of amortization following the bond outstanding method.
b.) Prepare journal entries for the current year.

SAMPLE PROBLEM #6
On January 1, 2019, Demeanor Company purchased bonds with face value of P5,000,000 to
held as financial assets at amortized cost. the entity paid P4,600,000 plus transaction costs of
P142,000. The bonds mature on December 31, 2021 and pay 6% interest annually on
December 31 of each year with 8% effective yield. The bonds are quoted at 105 on December
31, 2019. The bonds are sold at 110 on December 31, 2020.
REQUIRED:
a.) Prepare a table of amortization.
b.) Prepare journal entries for 2019 and 2020.

SAMPLE PROBLEM #7
On January 1, 2019, a company acquired for P5,241,500 the entire P5,000,000, 12% bond
issue of another entity to be held as financial assets at amortized cost. Bonds of P1,000,000
mature at annual interval beginning December 31, 2019. Interest is payable annually on
December 31. The bonds have a 10% effective rate. Prepare journal entries for 2019 and 2020
using the effective interest method.

SAMPLE PROBLEM #8
Durable Company purchased P3,000,000 face amount bonds for P3,111,510 on January 1,
2019 to be held as financial assets at amortized cost. The bonds carry a nominal rate of 8%
payable semiannually on June 30 and December 31. The bonds mature on January 1, 2021
with an effective rate of 6%.
REQUIRED:
a.) Prepare a table of amortization following the effective interest method.
b.) Prepare journal entries for 2019.

SAMPLE PROBLEM #9
On January 1, 2019, Agusan Company purchased bonds with face amount of P5,000,000. The
business model of the entity in managing the financial asset is not only to collect contractual
cash flows that are solely payment of principal and interest but also to sell the bonds in the open
market. The entity has not elected the fair value option of measuring financial asset. The entity
paid P4,600,000 plus transaction cost of P142,000 for the bond investment. The bonds mature
on December 31, 2021 and pay 6% interest annually on December 31 each year with 8%
effective yield. In addition, the bonds are quoted at 105 on December 31, 2019 and 110 on
December 31, 2020. The bonds are redeemed at face amount on December 31, 2021.
REQUIRED:
a.) Prepare a table of amortization.
b.) Prepare journal entries for 2019, 2020, and 2021.

SAMPLE PROBLEM #10

On January 1, 2019, Reign Company purchased 12% bonds with face amount of P5,000,000 for
P5,380,000. The bonds provide an effective yield of 10%. The bonds are dated January 1,
2019, mature on January 1, 2024 and pay interest annually on December 31 each year. the
bonds are quoted at 120 on December 31, 2019 and 115 on December 31, 2020. The entity has
elected the fair value option for the bond investment. Prepare journal entries for 2019 and 2020.

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SAMPLE PROBLEM #11

At the beginning of the current year, Havoc Company purchased ten-year bonds with a face
amount of P5,000,000 and a stated interest rate of 8% per year payable semiannually June 30
and December 31. The bonds were acquired to yield 10%. Present value factors are as follows:
Present value of 1 for 10 periods at 10% 0.386
Present value of 1 for 20 periods at 5% 0.377
Present value of an annuity of 1 for 10 periods at 10% 6.145
Present value of an annuity for 1 for 20 periods at 5% 12.462
REQUIRED:
a.) Compute for the purchase price of the bonds.
b.) Prepare journal entries to record transactions for the current year.

SAMPLE PROBLEM #12

On January 1, 2019, Labyrinth Company purchased serial bonds with face amount of
P3,000,000 and stated 12% interest payable annually every December 31. The bonds are to be
held as financial assets at amortized cost with a 10% effective yield. The bonds mature at an
annual installment of P1,000,000 every December 31.
Present value of 1 at 10% for one period 0.91
Present value of 1 at 10% for two periods 0.83
Present value of 1 at 10% for three periods 0.75
REQUIRED:
a.) Compute for the purchase price of the bonds.
b.) Prepare journal entries for 2019. The effective interest method of amortization is used.
c.) Compute the carrying amount of the bond investment on December 31, 2019.

Done? How are you doing so far? Here are the SOLUTIONS to the given sample problems.

SAMPLE PROBLEM #1

1/1 Trading securities 3,761,000

Cash 3,761,000
7/1 Cash (4,000,000x12%x6/12) 240,000
Interest income 240,000
12/31 Interest receivable 240,000
Interest income 240,000
FMV (4,000,000x105%) 4,200,000
Carrying amount 3,761,000
Unrealized gain- P/L 439,000

Trading securities 439,000

Unrealized gain - P/L 439,000

SAMPLE PROBLEM #2

a.) 8/1 Trading securities - Acme (5,000,000x104%) 5,200,000

Interest income (5,000,000x12%x3/12) 150,000
Cash 5,350,000
8/31 Trading securities - Avco (2,000,000x98%) 1,960,000
Interest income (2,000,000x12%x2/12) 40,000
Cash 2,000,000
11/1 Cash (5,000,000x12%x6/12) 300,000
Interest income 300,000
12/1 Cash 1,900,000
Loss on sale of trading securities (squeeze) 200,000
Trading securities - Acme (2,000/5,000x5,200,000) 2,080,000
Interest income (2,000,000x12%x1/12) 20,000
Selling price ([2,000x1,000]x102%) 2,040,000
Interest income 20,000
Total cash received 2,060,000
Less: Brokerage fee 160,000
Net cash received 1,900,000

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12/31 Interest receivable 60,000
Interest income (3,000,000x12%x2/12) 60,000
Cash (2,000,000x12%x6/12) 120,000
Interest income 120,000
Face amount - Acme 3,000,000
Multiply by (%) 98
FMV, 12/31 2,940,000
Carrying amount 3,120,000
Unrealized loss -180,000

Unrealized loss - P/L 180,000

Trading securities - Acme 180,000
Face amount - Avco 2,000,000
Multiply by (%) 99
FMV, 12/31 1,980,000
Carrying amount 1,960,000
Unrealized gain 20,000

Trading securities - Avco 20,000

Unrealized gain 20,000

b.) Trading securities - Acme 2,940,000

Trading securities - Avco 1,980,000
4,920,000

SAMPLE PROBLEM #3

2019 7/1 Trading securities 2,200,000

Interest income (2,000,000x8%x6/12) 80,000
Commission expense 50,000
Cash 2,330,000
12/31 Cash (2,000,000x8%) 160,000
Interest income 160,000
Face amount 2,000,000
Multiply by (%) 95
FMV, 12/31 1,900,000
Carrying amount 2,200,000
Unrealized loss -300,000

Unrealized loss 300,000

Trading securities 300,000
2020 3/31 Cash 2,140,000
Gain on sale of trading securities (squeeze) 200,000
Trading securities (2,200,000-300,000) 1,900,000
Interest income (2,000,000x8%x3/12) 40,000
Selling price 2,100,000
Interest income 40,000
Total cash received 2,140,000

SAMPLE PROBLEM #4

2019 10/1 Investment in bonds 4,300,000

Interest income (4,000,000x10%x3/12) 100,000
Cash 4,400,000
12/31 Interest receivable (4,000,000x10%x6/12) 200,000
Interest income 200,000
Term of the bonds (months):
2019 (October 1 to December 31) 3
2020 - 2025 (January 1 to December 31) 72
Total (months) 75

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Purchase price 4,300,000

Face value of the bonds 4,000,000
Premium on bonds 300,000
Divided by 75
Monthly amortization 4,000
Interest income (4,000x3) 12,000
Investment in bonds 12,000
2020 1/1 Interest income 200,000
Interest receivable 200,000
Cash 200,000
Interest income 200,000
7/1 Cash 200,000
Interest income 200,000
12/31 Interest income (4,000x12) 48,000
Investment in bonds 48,000
Interest receivable (4,000,000x10%x6/12) 200,000
Interest income 200,000

SAMPLE PROBLEM #5

1.) Bond
Year Fraction Amortization
Outstanding
2019 1,000,000 1,000/3,000 50,000
2020 800,000 800/3,000 40,000
2021 600,000 600/3,000 30,000
2022 400,000 400/3,000 20,000
2023 200,000 200/3,000 10,000
3,000,000 150,000
Purchase price 1,150,000
Less: Face value 1,000,000
Premium 150,000

2.) 1/1 Investment in bonds 1,150,000

Cash 1,150,000
6/30 Cash 60,000
Interest income (1,000,000x12%x6/12) 60,000
12/31 Cash 60,000
Interest income (1,000,000x12%x6/12) 60,000
Interest income 50,000
Investment in bonds 50,000
Cash 200,000
Investment in bonds 200,000

SAMPLE PROBLEM #6

1.) Interest Interest Discount Carrying

Date
received (6%) income (8%) amortization amount
1/1/19 4,742,000
12/31/19 300,000 379,360 79,360 4,821,360
12/31/20 300,000 385,709 85,709 4,907,069
12/31/21 300,000 392,931 92,931 5,000,000
Purchase price 4,742,000
Less: Face value 5,000,000
Discount 258,000

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2.) 2019 1/1 Investment in bonds 4,742,000

Cash 4,742,000
12/31 Cash 300,000
Investment in bonds 79,360
Interest income 379,360
2020 12/31 Cash 300,000
Investment in bonds 85,709
Interest income 385,709
Selling price (5,000,000x110%) 5,500,000
Carrying amount 4,907,069
Gain on sale of bonds 592,931

Cash 5,500,000
Gain on sale of bonds 592,931
Investment in bonds 4,907,069

SAMPLE PROBLEM #7

Interest Interest Premium Principal Carrying

Date
received (12%) income (10%) amortization payment amount
1/1/19 5,241,500
12/31/19 600,000 524,150 75,850 1,000,000 4,165,650
12/31/20 480,000 416,565 63,435 1,000,000 3,102,215
12/31/21 360,000 310,222 49,779 1,000,000 2,052,437
12/31/22 240,000 205,244 34,756 1,000,000 1,017,680
12/31/23 120,000 102,320 17,680 1,000,000 -

Purchase price 5,241,500

Less: Face value 5,000,000
Premium 241,500

2019 1/1 Investment in bonds 5,241,500

Cash 5,241,500
12/31 Cash 600,000
Investment in bonds 75,850
Interest income 524,150
Cash 1,000,000
Investment in bonds 1,000,000
2020 12/31 Cash 480,000
Investment in bonds 63,435
Interest income 416,565
Cash 1,000,000
Investment in bonds 1,000,000

SAMPLE PROBLEM #8

1.) Interest Interest Premium Carrying

Date
received (4%) income (3%) amortization amount
1/1/19 3,111,510
6/30/19 120,000 93,345 26,655 3,084,855
12/31/19 120,000 92,546 27,454 3,057,401
6/30/20 120,000 91,722 28,278 3,029,123
12/31/20 120,000 90,877 29,123 3,000,000

Purchase price 3,111,510

Less: Face value 3,000,000
Premium 111,510

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2.) 2019 1/1 Investment in bonds 3,111,510

Cash 3,111,510
6/30 Cash 120,000
Investment in bonds 26,655
Interest income 93,345
12/31 Cash 120,000
Investment in bonds 27,454
Interest income 92,546

SAMPLE PROBLEM #9

1.) Interest Interest Discount Carrying

Date
received (6%) income (8%) amortization amount
1/1/19 4,742,000
12/31/19 300,000 379,360 79,360 4,821,360
12/31/20 300,000 385,709 85,709 4,907,069
12/31/21 300,000 392,931 92,931 5,000,000

Purchase price 4,742,000

Less: Face value 5,000,000
Discount 258,000

2.) 2019 1/1 Financial asset - FVOCI 4,742,000

Cash 4,742,000
12/31 Cash 300,000
Financial asset - FVOCI 79,360
Interest income 379,360
FMV (5,000,000x105%) 5,250,000
Carrying amount, 12/31/19 4,821,360
Unrealized gain 428,640

Financial asset - FVOCI 428,640

Unrealized gain 428,640
2020 12/31 Cash 300,000
Financial asset - FVOCI 85,709
Interest income 385,709
FMV (5,000,000x110%) 5,500,000
Carrying amount, 12/31/20 5,335,709
Unrealized gain 164,291

Financial asset - FVOCI 164,291

Unrealized gain 164,291
2021 12/31 Cash 300,000
Financial asset - FVOCI 92,931
Interest income 392,931
Cash (face value) 5,000,000
Unrealized gain - OCI (cumulative) 592,931
Financial asset - FVOCI 5,592,931

Financial asset - FVOCI

1/1 4,742,000
12/31 79,360
428,640
2019, 12/31 5,250,000
12/31 85,709
5,335,709
164,291
2020, 12/31 5,500,000
12/31 92,931
2021,12/31 5,592,931

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SAMPLE PROBLEM #10

2019 1/1 Financial asset - FVPL 5,380,000

Cash 5,380,000
12/31 Cash (5,000,000x12%) 600,000
Interest income 600,000
FMV (5,000,000x120%) 6,000,000
Carrying amount, 12/31/19 5,380,000
Gain 620,000

Financial asset - FVPL 620,000

Gain from change in fair value 620,000
2020 12/31 Cash (5,000,000x12%) 600,000
Interest income 600,000
FMV (5,000,000x115%) 5,750,000
Carrying amount, 12/31/20 6,000,000
Loss -250,000
Loss from change in fair value 250,000
Financial asset - FVPL 250,000

Financial asset - FVPL

1/1 5,380,000
12/31 620,000
2019, 12/31 6,000,000
250,000 12/31
2020, 12/31 5,750,000

SAMPLE PROBLEM #11

1.) PV of principal (5,000,000 x 0.377) 1,885,000

PV of interest (5,000,000x4%x12.462) 2,492,400
Purchase price 4,377,400

Purchase price 4,377,400

Less: Face value 5,000,000
Discount 622,600

2.) Interest Interest Discount Carrying

Date
received (4%) income (5%) amortization amount
1/1/19 4,377,400
6/30/19 200,000 218,870 18,870 4,396,270
12/31/19 200,000 219,814 19,814 4,416,084

1/1 Investment in bonds 4,377,400

Cash 4,377,400
6/30 Cash 200,000
Investment in bonds 18,870
Interest income 218,870
12/31 Cash 200,000
Investment in bonds 19,814
Interest income 219,814

SAMPLE PROBLEM #12

1.) PV of principal and interest, 2019:

Principal (1,000,000 x 0.91) 910,000
Interest (3,000,000x12%x0.91) 327,600 1,237,600
PV of principal and interest, 2020:
Principal (1,000,000 x 0.83) 830,000
Interest (2,000,000x12%x0.83) 199,200 1,029,200

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PV of principal and interest, 2021:

Principal (1,000,000 x 0.75) 750,000
Interest (1,000,000x12%x0.75) 90,000 840,000
Purchase price 3,106,800
Purchase price 3,106,800
Less: Face value 3,000,000
Premium 106,800

2.) Interest Interest Premium Principal Carrying

Date
received (12%) income (10%) amortization payment amount
1/1/19 3,106,800
12/31/19 360,000 310,680 49,320 1,000,000 2,057,480
12/31/20 240,000 205,748 34,252 1,000,000 1,023,228
12/31/21 120,000 143,228 23,228 1,000,000 -

1/1 Investment in bonds 3,106,800

Cash 3,106,800
12/31 Cash 360,000
Investment in bonds 49,320
Interest income 310,680
Cash 1,000,000
Investment in bonds 1,000,000

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