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MODULE 8 PACKET
AE 15 and ELEC 1 – INTERMEDIATE ACCOUNTING
MODULE 8 INVESTMENT IN ASSOCIATE

Welcome to Module 8
In this module, we will identify the methods of accounting for investment in associate and held-to-maturity
securities. At the end of this module, you will be answering multiple choice questions and straight
problems.

CONSULTATION HOURS:
Virtual time: During your class schedule (either Monday or Tuesday)
Phone or Messenger: Every Thursday from 8am to 11am and 1pm to 4pm

MODULE 8 LEARNING OBJECTIVES:

By the end of this module, the students will be able to:
1. Identify the methods of accounting for investment.
2. Describe changes in equity, discontinuance of equity method and change from cost to equity
method of accounting.
3. Describe the classification and valuation of bonds.
4. Differentiate callable, convertible, serial and term bonds from one to another.
5. Compute amortization of bond premium and discount under the various methods of amortization.

COURSE CONTENT FOR MODULE 8:

ACTIVITY DESCRIPTION TIME TO COMPLETE

Lecture discussion Equity Method 1 hour

Lecture discussion Cost Method 1 hour

ACTIVITY 8 Parts 1 and 2 Problem Solving 2 hours

Assigned Reading Investment in Bonds 1 hour

Quiz Summative quiz for module 8 (to be announced) 1 hour

Answers to ACTIVITY 8 will be due on October 14, 2020 thru Google Classroom or Facebook
Groups. Correct answers will be posted thereafter for your reference.

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LECTURE DISCUSSIONS

8.1 INVESTMENT IN ASSOCIATE

An entity purchases enough shares of another entity in order to exert significant influence over the financial
and operating policies of the investee entity.

Significant influence is the power to participate in the financial and operating policy decisions Of the
investee but not control or joint control over those policies.

If the investor holds, directly or indirectly through subsidiaries, 20% or more of the voting power of the
investee, it is presumed that the investor has significant influence, unless it can be clearly demonstrated
that this is not the case.

Conversely, if the investor holds, directly or indirectly through subsidiaries, less than 20% of the voting
power of the investee, it is presumed that the investor does not have significant influence, unless such
influence can be clearly demonstrated.

Beyond the mere 20% threshold of ownership, existence of significant influence is usually evidenced by
the following factors:
a. Representation In the board of directors
b. Participation in policy making
c. Material transactions between the investor and the investee
d. Interchange of managerial personnel
e. Provision of essential technical information

An entity loses significant influence over an investee when it loses the power to participate in the financial
and operating policy decisions of the investee. It can occur when an associate becomes subject to control
of a government, court, administrator or regulator. It can also occur as a result of a contractual
agreement.

Equity Method

The equity method is based on the economic relationship between the investor and investee. They are
viewed as a single economic unit. The equity method is applicable with the investor has a significant
influence over the investee.

Accounting procedures:

a. The investment is initially recorded at cost.

b. The carrying amount is increased by the investor's share of the profit of the investee and
decreased by the investor's share of the loss of the investee. The investor's share of the profit
and loss of the investee is recognized as investment income.
c. Distributions or dividends received from an equity investee reduce the carrying amount of the
investment.

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d. The investment must be in ordinary shares. If it is in preference shares, the equity method is
not appropriate regardless of the percentage because the preference share is a non-voting
equity. The investment in preference shares may be accounted for as at FVPL or FVOCI or at
cost.
e. Technically, if the investor has significant influence over the investee, the investee is said to be
an associate. Under the equity method, the investment in ordinary shares should be
appropriately described as investment in associate.
f. The investment in associate accounted for using the equity method shall be classified as non-
current asset.

On January 1, 2020, an The investment represents a 20% Investment in associate 2,000,000

investor purchased 10,000 equity interest and the investor Cash 2,000,000
shares of the 50,000 has a significant influence over the
outstanding ordinary investee. The acquisition cost is
shares of another entity at equal to the carrying amount of the
P200 per share. net assets acquired.
The investee reported a The investor recognized a share in Loss on investment 200,000
net loss of P1,000,000 the net loss of the investee equal Investment in associate 200,000
for 2020 to 20%
Received a 25% share Shares now held 12,500. Memo - received 2,500 ordinary shares
dividend from the investee as 25% share dividend on 10,000 original
on December 31, 2020 shares.
The investee reported net The investor recognized a share Investment in associate 600,000
income of P3,000,000 for of the net income of the investee Investment income 600,000
2021. equal to 20% of P3,000,000
The investee declared and The investor recognized a share in Cash 300,000
paid a cash dividend of the cash dividend paid by the Investment in associate 300,000
P1,500,000 on ordinary investee equal to 20%.
shares on December 2021 Note that under the equity method, cash dividend is not an income but a
reduction of investment.

Excess of cost over carrying amount

If the investor pays more than the carrying amount of the net assets acquired, the difference is known as
“ excess of cost over carrying amount” and may be attributed to the following:
a. Undervaluation of the investee’s assets, such as building, land and inventory.
b. Goodwill

In practice, it is difficult to determine which specific identifiable assets are undervalued. If the assets of
the investee are fairly valued, the excess of cost over carrying amount of the underlying net assets is
attributed to goodwill.

If the excess is attributable to undervaluation depreciable asset (excluding land because it is not
depreciable), it is amortized over the remaining life of the depreciable asset. The amount is expensed
when land is sold.

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If the excess is attributable to inventory, the amount is expensed when the inventory is already sold. If it
is attributable to goodwill, it is included in the carrying amount of the investment and not amortized.

The entire investment in associate including the goodwill is tested for impairment at the end of each
reporting period.

An investor purchased The carrying amount of the investee’s To amortize the excess of cost if
20% of the outstanding net assets was P15,000,000. remaining life of depreciable asset is 5
ordinary shares of another years: 700,000/5yrs
entity for P4,000,000. The Acquisition Cost 4,000,000
net assets were fairly Carrying amount of Investment income 140,000
valued except for a net assets acquired 3,000,000 Investment in associate 140,000
depreciable asset with a Excess of Cost over
fair value greater than its Undervaluation of
Carrying amount 1,000,000 depreciable asset 700,000 (3.5M x 20%)
carrying amount by
Goodwill – remainder 300,000
P3,500,000. Any excess is
for goodwill. (20% of 15M)

When depreciable and intangible assets of the investee are undervalued, depreciation and amortization
are naturally understated resulting to overstatement of the investee’s net income. The investor should
decrease investment income.

The “ excess of cost” attributable to goodwill is not amortized. It is included in the carrying amount of the
investment in associate.

Excess of net fair value over cost

Any excess of the investor's share of the net fair value of the associate’s identifiable assets and liabilities
over the cost of the investment is included as income in the determination of the investor's share of the
associate’s profit or loss in the period in which the investment is acquired.

Appropriate adjustments to the investor’s share of the associate’s profit or loss after acquisition are also
made to account, for example, for depreciation of depreciable assets based on their fair value on the
acquisition date.

At the beginning of the current year, an investor purchased 40% of the ordinary shares outstanding of an
investee for P12,000,000 when the net assets of the investee amounted to P25,000,000.

The carrying amount of the identifiable assets and liabilities of the investee were equal to their fair
value, except for the following:
a. Equipment whose fair value was P6,000,000 greater than the carrying amount
b. Inventory whose fair value was P1,500,000 greater than the carrying amount

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Computation

Acquisition cost 12,000,000

Carrying amount of net assets acquired (P25M x 40%) 10,000,000
Excess of cost over carrying amount 2,000,000
Excess attributable to equipment (P6M x 40%) (2,400,000)
Excess attributable to inventory (P1.5M x 40%) (600,000)
Excess net fair value over cost (1,000,000)

The equipment has a remaining life of 5 years and the inventory was all sold during the current year.

The investor reported net income of P10,000,000 for the current year and paid P4,000,000 cash dividend
at year-end.

To record the investment Investment in associate 12,000,000

Cash 12,000,000
To record the share in net income Investment in associate 4,000,000
(P10M x 40%) Investment income 4,000,000
To record the share in cash dividend Cash 1,600,000
(P4M x 40%) Investment in associate 1,600,000
To record amortization of excess attributable Investment income 480,000
to equipment (P2.4M / 5yrs) Investment in associate 480,000
To record amortization of excess attributable Investment income 600,000
to inventory. Fully expensed since all was sold Investment in associate 600,000
To record the excess net fair value over cost Investment in associate 1,000,000
Investment income 1,000,000

The investment income for the year is at P3,920,000.

Investment in Associate Investment Income

• Investment • Share in net loss • Amortization • Share in net income
• Share in net income • Share in cash dividend of excess of • Excess net fair value
• Excess net fair value • Amortization of excess cost over cost
over cost of cost 480,000 4,000,000
600,000 1,000,000
• Share in revaluation
surplus 3,920,000

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Investee with heavy losses

If an investor’s share of losses of an associate equals or exceeds the carrying amount of his investment,
the investor discontinues recognizing its share of further losses and the investment is reported at zero
value.

The carrying amount of the investment in associate includes other long-term interests in an associate, such
as long-term receivables, loans and advances, and investment in preference shares.

Trade receivables and any long term receivables for which adequate collateral exists, such as secured
loans, are excluded from the carrying amount of an investment in associate.

Additional losses are provided for or a liability is recognized, the extent that the investor has incurred legal
or constructive obligations or made payments on behalf of the associate. If the associate subsequently
reports income, the investor resumes including its share of such income after its share of the income
equals the share of losses not recognized.

On January 1, 2020, an investor acquired 25% of the ordinary shares of an associate for P500,000. The
identifiable assets and liabilities of the associate were measured at fair value and there is no goodwill from
the transaction.
Acquisition
The profits and losses of the associate over the first 5 years of operations were: Cost 500,000
Loss in
Profit(Loss) Investor’s share Journal Entries 2019 (25,000)
2019 (100,000) (25,000) Loss on investment 25,000 CV 475,000
Investment in associate 25,000
2020 (2,000,000) (500,000) Loss on investment 475,000 Although loss is P500,000
the amount to be
Investment in associate 475,000 recognized cannot exceed
2021 40,000 10,000 No entry the carrying amount
Unrecognized loss in 2020 (25,000)
Share in profit in 2021 10,000
Remaining unrecognized loss (15,000) Share in income 50,000
2022 200,000 50,000 Investment in associate 35,000 Unrecognized
Investment income 35,000 Loss (15,000)

Impairment loss

An impairment loss shall be recognized whenever the carrying amount of the investment in associate
exceeds recoverable amount.

The recoverable amount is measured as the higher between the fair value less cost of disposal and value
in use. It is assessed for each individual associate. An exception is when an individual associate does
not generate cash inflows from continuing use that are largely Independent of those from other assets of
the reporting entity.

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Fair value is the price that would be received to sell an asset in an orderly transaction between market
participants at the measurement date.

Value in use is the present value of the estimated future cash flows expected to arise from the continuing
use of an asset and from its ultimate disposal.

The value in use of an investment in associate is the investor’s share in either of the following:
a. Present value of estimated future cash flows expected to be generated by the investee, including
cash flows from operations of the investee and the proceeds of the ultimate disposal of the
investment
b. Present value of the estimated future cash flows expected to arise from dividends to be received
from the investment and from its ultimate disposal

Since goodwill is not separately recognized from the investment amount, the impairment loss recognized
is applied to the investment as a whole.

Investee with preference shares

When an associate has outstanding cumulative preference shares, the investor shall compute its share of
earnings or losses after deducting the preference dividends, whether or not such dividends are declared.

When an associate has outstanding noncumulative preference shares, the investor shall compute its share
of earnings after deducting the preference dividends only when declared.

An investee reported the following capital accounts at the beginning of current year:
Preference share capital, 12% cumulative, P10 par, 50,000 shares issued 500,000
Ordinary share capital, P50 par, 50,000 shares authorized and
20,000 shares issued 1,000,000
Retained earnings 500,000

An investor acquired 4,000 ordinary shares of the Investment in associate 300,000

investee representing a 20% interest for P300,000. Cash 300,000
The net assets of the investee are fairly valued.
The investee reported net income of P200,000 for the Investment in associate 28,000
current year. Investment Income 28,000
(200,000 – 60,000 preferred dividends = 140,000 x 20% share)
Paid cash dividends of P50,000 to ordinary shareholders Cash (50,000 x 20% share) 10,000
and the preference dividends at the preference rate Investment in associate 10,000

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Other changes in equity

Adjustments to the carrying amount of the investment in associate may be necessary for changes in the
investor’s proportionate interests in the investee arising from changes in the investee’s equity that have
not been recognized in the investee’s profit or loss. Such changes include those arising from revaluation
of property, plant and equipment and from foreign exchange translation differences. The investor’s share
of those differences is recognized directly in equity of the investor.

A 20% investment was acquired wherein the investor Investment in associate 80,000
has significant influence over the investee. The Investment Income 80,000
investee reported net income of P400,000 for the year.
Paid cash dividends of P100,000. Cash 20,000
Investment in associate 20,000
Revaluation surplus of P300,000. Investment in associate 60,000
Revaluation surplus – investee 60,000

ACTIVITY 8 – PART 1 Write your answers in a sheet of paper, take its picture and upload in Module 7
Assignment in Google Classroom.

Problem 1. Prepare journal entries and compute the investment income and investment in associate
for 2020 and 2021.

At the beginning of 2020, Sure Corp. purchased 40% of the ordinary shares of another entity for
P3,000,000 when the net assets acquired amounted to P6,500,000.

At acquisition date, the carrying amounts of the identifiable net assets were equal to their fair
value, except for equipment with a fair value greater than carrying amount by P1,000,000 and inventory
whose fair value was P400,000 greater than cost. The equipment has a remaining life of 5 years and
the inventory was all sold during the current year.

The investee had the following in 2020 and 2021, respectively: Net income P2,000,000 P700,000
Paid dividends P500,000 60,000

Problem 2. Prepare journal entries from 2018 to 2020 in relation to the investment in associate.

On January 1, 2018, Corona acquired a long-term investment for P5,000,000 for a 30% interest in an
investee when the net assets was fairly valued. The investee reported the following net losses for the
three-year period: P5,000,000 - P8,000,000 - P12,000,000.

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8.2 Discontinuance of the equity method

PAS 28, paragraph 22, provides that an investor shall discontinue the use of the equity method from the
date that it ceases to have significant influence over an associate. The investor shall account for the
investment as follows:

a. Financial asset at fair value through profit or loss

b. Financial asset at fair value through other comprehensive income
c. Nonmarketable investment at cost or investment in unquoted equity instrument

On the date the significant influence is lost, the investor shall measure any retained investment in
associate at fair value, which is regarded as the fair value on initial recognition as a financial asset.

The difference between the carrying amount of the retained investment at the date the significant influence
is lost and the fair value of the retained investment shall be included in the profit or loss.

The difference between the net proceeds from disposal of part of the investment and the carrying amount
of the investment sold is also included in profit or loss.

Illustration

An entity purchased 30,000 ordinary shares of the 100,000 of common shares of another
entity representing 30% interest several years ago. At year-end, the investment in associate has a
carrying amount of P6,000,000. On the same date, the investor sold 20,000 shares for net proceeds of
P5,000,000 resulting to a loss of significant influence. The quoted market price for fresh investment is
P260 per share on the date of sale.

To record in the sale of 20,000 shares Cash 5,000,000

or 20% interest Investment in associate 4,000,000
(P6M / 30,000 x 20,000 shares) Gain on sale of investment 1,000,000
To remeasure the retained investment Investment in associate 600,000
of 10,000 shares or 10% interest Gain from remeasurement to fair value 600,000
Fair value of shares retained (10,000 x P260) 2,600,000
Carrying amount of retained investment (P6M – P4M) 2,000,000
included in profit (loss)
Gain from remeasurement 600,000

To reclassify the retained investment Financial asset - FVPL 2,600,000

as financial asset at FVPL Investment in associate 2,600,000

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Equity method not applicable

If the investor is a parent that is exempted from preparing consolidated financial statements or if all of the
following apply:

1. The investor is a wholly-owned subsidiary, or a partially-owned subsidiary of another entity and

the other owners do not object to the investor not applying the equity method.
2. The investor’s debt and equity instruments are not traded in a public market or “over the
counter” market.
3. The investor did not file or it is not in the process of filing financial statements with the SEC for the
purpose of issuing any class of instruments in a public market
4. The ultimate or any intermediate parent of the investor produces consolidated financial statements
available for public use that comply with Philippine Financial Reporting Standards.

In these circumstances, the investment is accounted for as follows:

a. Financial asset at fair value through profit or loss

b. Financial asset at fair value through other comprehensive income
c. Nonmarketable investment at cost or investment in unquoted equity instrument

Associate held for sale

If the investment in associate is classified as held for sale, it is accounted for in accordance with PFRS
5. The investment in associate classified as held for sale shall be measured at the lower of carrying
amount and fair value less cost of disposal.

Investment of less than 20%

If the investor holds, directly or indirectly, through subsidiaries less than 20% of the voting power of the
investee, it is presumed that the investor does not have significant influence, unless such influence can
be clearly demonstrated.

Accounting for investment of less than 20%

a. fair value method - applicable to financial asset measured at FVPL or FVOCI
b. cost method - applied with respect to investment in unquoted equity instrument or nonmarketable
equity investment.

Under the fair value and cost method, the investor does not share in the profit or loss of the investee
because of the legal relationship between the investor and investee, who are independent of the other.

In applying the fair value and cost method, dividends received from an investee are recognized as
dividend income, regardless of whether the dividends originated from pre-acquisition retained earnings
or post-acquisition retained earnings.

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On January 1, 2020, an investor purchased 1,000 Investment in shares 200,000

shares of the 10,000 outstanding ordinary shares of Cash 200,000
another entity at P200 per share. The investment is
unquoted and represents a 10% equity interest.
The investee reported net income of P200,000 for No entry. The investor does not recognize a
2020. share in the net income of the investee.
The investor received a 20% share dividend on Received 200 ordinary shares from investee
December 31, 2020. as 20% share dividend on 1,000 original
shares. Shares now held: 1,200 shares.
The investee reported a net loss of P3,000,000 for No entry. The investor does not recognize a
2021. share in the net loss of the investee.
The investee declared and paid a cash dividend of Cash (10% of 100,000) 10,000
P100,000 on December 31, 2021 Dividend income 10,000
The investor sold 300 ordinary shares at P250 per Cash 75,000
share on December 31, 2021. Investment in shares 50,000
(P200,000 / 1,200 x 300 shares) Gain on sale of investment 25,000

investment in associate achieved in stages

An investor owned a 10% interest in an investee on January 1,2019. An additional 10% interest from the
same investee was acquired on January 1, 2020 enabling the investor to exercise significant
influence over the investee.

In 2019, the investment is accounted for under the cost or fair value method. In 2020, the investment
must be accounted for under the equity method because that investee is now an associate. This scenario
is known as “ investment in associate achieved in stages”.

Fair Value Approach

a. The existing interest in the associate is remeasured at fair value with any change in fair value included
in profit or loss
b. If the existing interest is accounted at fair value through other comprehensive income, any unrealized
gain or loss at the date the investee becomes an associate is reclassified as retained earnings.
c. Total cost of the investment for the initial application of the equity method = fair value of the existing
interest plus the cost of additional interest acquired constitutes the
d. Excess of cost over carrying amount or excess net fair value = total cost of the investment for
the initial application of the equity method minus the carrying amount of the net assets acquired at
the date significant influence is obtained

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Taken from Intermediate Accounting 1 by Valix and Peralta

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Taken from Intermediate Accounting 1 by Valix and Peralta

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Taken from Intermediate Accounting 1 by Valix and Peralta

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Taken from Intermediate Accounting 1 by Valix and Peralta

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ACTIVITY 8 – PART 2 Write your answers in a sheet of paper, take its picture and upload in Module 7
Assignment in Google Classroom.

Problem 1. Compare the fair value and equity methods of accounting for investments in shares
subsequent to acquisition.

Problem 2. Fill in the peso changes (indicate if positive or negative) caused in the Investment account
and Dividend Income or Investment Income account by each of the following transactions,
assuming Drone Company uses (a) the fair value method and (b) the equity method for
accounting for its investments in Jade Company.

(a) Fair Value Method (b) Equity Method

Transactions Investment Dividend Investment Investment
Account Income Account Income
At the start of Year 1, Drone bought 30% of
Jade's ordinary shares at their book value.
Total book value of all Jade's ordinary shares
was P800,000 on this date.
During Year 1, Jade reported P60,000 of net
income and paid P30,000 of dividends.
During Year 2, Jade reported P30,000 of net
income and paid P40,000 of dividends.
During Year 3, Jade reported a net loss of
P10,000 and paid P5,000 of dividends.
Indicate the Year 3 ending balance in the
Investment account, and cumulative totals for
Years 1, 2, and 3 for dividend income and
investment income.

Problem 3. In 2018, Dee acquired a 10% interest in Box Company by owning 25,000 shares for
P2,000,000. This was accounted under the cost method. On January 2019, this 10% existing
interest had a fair value of P2,400,000.
On January 1, 2019, Dee paid P5,000,000 for 50,000 additional ordinary shares of Box which
represented a 20% investment in Box Company. The fair value of Box’s identifiable net
assets was equal to their carrying amount of P20,000,000.
Box reported net income of P6,000,000 and paid dividend of P20 per share on December 31,
2019.

1. Compute the goodwill arising from the acquisition on January 1, 2019.

2. Prepare journal entries for 2019 and determine the investments in equity securities at year-end.

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8.3 Investment in Bonds

Bonds may be acquired as current or noncurrent investment depending on the business model of
managing financial assets. They can be classified and accounted for as follows:
a. Financial asset held for trading
b. Financial asset at amortized cost
c. Financial asset at FVOCI
d. Financial asset at FVPL by irrevocable designation or by fair value option

Accounting for bonds depend on whether they were acquired on interest date or between interest dates.
The purchase price normally includes the accrued interest if acquisition is between interest dates.

should not be reported as part of the cost of the investment but should be accounted for separately.

Bonds held for trading

Illustration

2/1 An entity acquired 12% bonds (to be held for Trading securities 218,000
trading) with face amount of P200,000 for Interest Income 2,000
P220,000 which includes accrued interest of Cash 220,000
P2,000. Interest paid every January 1 & July 1.
7/1 Receipt of first semi-annual interest Cash 12,000
(P200,000 x 12% x 6/12) Interest Income 12,000
11/1 Sold half of the bonds for P120,000 inclusive of Cash 120,000
accrued interest (July-Nov = P100,000 x 12% x 4/12) Trading securities 109,000
Interest Income 4,000
Gain on sale of trading securities 7,000
12/31 Recorded the accrued interest on the remaining Accrued Interest Receivable 6,000
bonds of P100,000. (July-December) Interest Income 6,000
12/31 The bonds are quoted at 120 at the end of the Trading securities 11,000
year. Changes in fair value of trading Unrealized gain - TS 11,000
securities are recognized as profit or loss. (P100,000 x 120 = P120,000 FV – 109,000 CV )

When bond investment is held for “trading” or measured at FVPL, it is not necessary to amortize any
premium or discount.

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Investment in Bonds at amortized cost

A financial asset shall be measured at amortized cost if both of the following conditions are met:
a. The business model is to hold the financial asset in order to collect contractual cash flows on
specified dates.
b. The contractual cash flows are solely payments of principal and interest on the principal amount
outstanding.
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.

When bonds are acquired and classified as financial asset at amortized cost, the bond investments are
classified as noncurrent investments. 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, which on
the part of the bondholder is from the date of acquisition to the date of maturity.

Amortization of bond Investment in bonds xx Amortization of Interest Income xx

discount Interest Income xx bond premium Investment in bonds xx

Bonds are amortized to bring the carrying amount of the investment to face amount on the date of maturity.

Illustration
4/1/19 - Purchased P500,000 face amount 12% bonds Investment in bonds 470,000
at 94. Bonds pay interest semiannually April 1 and Oct Cash 470,000
1 and mature on 4/1/2024 (P500,000 x 0.94)
10/1/19 - Received semiannual interest Cash 30,000
(P500,000 x 12% x 6/12) Interest Income 30,000
12/31/19 – Adjustment for accrued interest for 3 months Accrued interest receivable 15,000
(P500,000 x 12% x 3/12) Interest Income 15,000
12/31/19 – Amortization of the bond discount from 4/1 Investment in bonds 4,500
to 12/31 (Face 500,000 – Cost 470,000 = Discount 30,000) Interest Income 4,500
(P30,000/5yrs * 9/12 months)

In the succeeding years, annual amortization will be recognized until the maturity date.
Investment in Bonds
April 1, 2019 Cost 470,000 Balance, April 1, 2024 500,000
Dec. 31, 2019 Amortization 4,500
Dec. 31, 2020 Amortization 6,000
Dec. 31, 2021 Amortization 6,000 Redemption of bonds in 2024
Dec. 31, 2022 Amortization 6,000 Cash 500,000
Dec. 31, 2023 Amortization 6,000 Investment in bonds 500,000
Apr. 1, 2024 Amortization . 1,500
500,000

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BACHELOR OF SCIENCE IN ACCOUNTANCY

Callable Bonds – are those that may be called in or redeemed by the issuing entity prior to their date of
maturity. Usually, the call price or redemption price is at a premium or more than the face amount of the
bonds.
Redemption price – Carrying amount on the date of redemption = profit or loss

Convertible Bonds – can be exchanged by the bondholders for share capital of the issuing entity at any
time prior to maturity. Investment in convertible bonds can be classified as financial assets measured at
fair value.

Serial Bonds have a series of maturity dates and are payable in installments. While term bonds mature
on a single date. Callable and convertible bonds, despite their special features, can be classified as term
bonds.

Methods of amortization:
a. Straight line method – provides for an equal amount of premium or discount amortization each
accounting period.
b. Bond outstanding method – applicable to serial bonds and provides for a decreasing amount of
amortization.
c. Effective interest method or simply “interest method” or scientific method which provides for an
increasing amount of amortization.

In accordance with PFRS 9, bond investments shall be classified as financial assets measured at
amortized cost using the effective interest method. Any discount or premium must be amortized using the
effective interest method. The straight line and bond outstanding method are acceptable only when the
computation will result in periodic interest income that is not materially different from the amount that would
be computed using the effective interest method.

EXERCISE – Try this!!!

Prepare the entries for Matt Company with the following transactions during the 2018:

Aug. 1 Purchased 12% Ace bonds (held for trading) worth P500,000 at 104 (meaning P500,000 x 1.04)
plus accrued interest of P15,000. The bonds pay interest on May 1 and November 1.
Oct. 1 Purchased P1,000,000, 10% bonds of Tin Corp for P1,190,000 including accrued interest of
P25,000. The bonds mature on July 1, 2021, pay interest every January 1 and July 1.
Nov.1 Receipt of first semiannual from Ace Company.
Dec. 31 Prepare the entries given the following:
Ace bonds was quoted at 99.
Interest that accrued for the bonds from Ace and Tin Corp.
Amortization of the premium of Tin Corp using the straight line method.

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