RIZAL TECHNOLOGICAL UNIVERSITY

Cities of Mandaluyong and Pasig

LESSON 3

MODULE NO. 3: INVESTMENTS IN DEBT SECURITIES

AND OTHER NONCURRENT FINANCIAL ASSETS

1. Nature and Characteristics of Investments

2. Nature, Characteristics and Accounting Procedures for Investment
in Debt Securities/Bonds
3. Reclassification of Debt Instruments
4. Funds for Future Use such as Bond Sinking Fund, Cash Surrender
Value and Long-term Advances and Deposits

Overview

This module is prepared for the students to understand the nature of

investments in debt securities and other financial noncurrent assets.
This module introduces the nature of investments in general, discusses
investment in debt securities, its characteristics, types and classification,
initial recognition and measurement, subsequent measurement and
reclassification, derecognition and presentation in the financial statements.
This module also discusses the nature of other financial non-current
assets that must be recognized and presented in the financial statements.
This module will cover a brief discussion of the theory and standard
behind the topic, exercises and practice problem the cover the said topic.

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Cities of Mandaluyong and Pasig

Study Guide

This module is designed for the students to understand provisions,

contingencies and other liabilities. This module includes:
1. Topic Discussions - to be read by the students to fully understand the
topic.
2. Assessment – to be accomplished by the students after the
discussion to test their skills and understanding to the subject matter.
3. Assignment – activity to be done by students to be submitted to the
instructor. This is to reinforce or advance the student’s learning. It is
relevant to the past, current, and future lessons.
To complete the requirements of this module, the students are required to:
1. Read and understand the topic discussion and the guided exercises
2. Accomplish the assessment.
3. Accomplish the assignment due on next meeting.

Learning Outcomes

At the end of the discussion, the students are expected to:

1. Identify and describe different types of debt securities, its classification
as a financial asset, its initial recognition and measurement,
subsequent measurement and reclassification, derecognition and
presentation in the financial statements.
2. Explain the nature and formulate entries on long-term funds, cash
surrender value and long-term advances and deposits.

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

Topic Presentation

INTRODUCTION TO INVESTMENTS AND INVESTMENTS IN DEBT SECURITIES

Investments are assets held by an entity for the accretion of wealth, through
distribution such as interest, royalties, dividends and rentals, for capital
appreciation or for other benefits to the investing entity such as those obtained
through trading relationships.
Examples of investments include:
1. Investment in debt securities
2. Investment in equity securities
3. Funds for long-term use such as sinking funds, funds for future use, cash
surrender value of life insurance policies, etc.
Debt securities
A debt security pertains to a financial debt instrument which can be bought or sold
between two parties has basic terms defined, such as amount borrowed, interest
rate, maturity and renewal date.
Bonds
A bond is a formal unconditional promise, made under seal, to pay a specified sum of
money at a determinable future date and to make periodic interest payment at a
stated rate until the principal sum is paid.
Parties involved in the bond agreement:
1. Bond issuer (borrower)
2. Bondholder (investor/lender)
3. Underwriter/arranger (one who serves as a middleman for a fee from the borrower)

Bond Certificate
This is a certificate of indebtedness issued by the bond issuer which entitles the
bondholder to receive principal and interest payments. This serves as a proof of
ownership over the bonds by the investor.

Bond Indenture (deed of trust, bond resolution or bond contract)

This is the unconditional contract between the bond issuer and the bondholder that
specifies the terms of the bond. Terms may include the
a. interest date,
b. date when the interest will be paid,
c. maturity date/s and the provision for repayment,
d. establishment of funds to cover periodic payments of interest and principal
e. Provisions regarding security or collateral for bonds issued
f. Other terms and conditions of the bond issue that may be required by the
parties involved such as financial ratios and working capital requirements

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Cities of Mandaluyong and Pasig

Types of Bonds

TYPE DESCRIPTION
With reference to maturity
Term bonds Bonds which mature on a single date
Serial bonds Bonds with a series of maturity date
With reference to attached security
Mortgage bonds Bonds secured by a mortgage on real properties
Collateral trust bonds Bonds secured by stocks and bonds of another
corporation
Guaranteed bonds Bonds guaranteed by another party’s promise to
pay in case the bond issuer fails to make
payments
Debenture bonds Bonds without any security or collateral
With reference to registration in the books of the bond issuer
Registered bonds Bonds in which the names of the bondholder are
registered in the books of the bond issuer
Coupon or bearer bonds Bonds in which the holder of the bond certificate
is the acknowledged bondholder. The bond
issuer does not maintain any record to monitor
persons who own the bonds.
Other types of bonds
Convertible bonds Bonds that entitle bondholder to convert the
bonds into shares of the issuing entity
Callable bonds Bonds which may be redeemed prior to maturity
Junk bonds High-risk, high-yield bonds issued by entities
that are heavily indebted
Zero-interest bonds Bonds whose principal and interest payments
are made at the end of the term of the bonds

Classification of Investment in Debt Securities

1. Financial asset at fair value through Profit or Loss (FVPL)
2. Financial assets at amortized cost (FAAC)
3. Financial asset at fair value through Other Comprehensive Income (FVOCI)
Initial Recognition
Under PFRS 9, financial assets are recognized when, and only when the entity
becomes party to the contractual provisions of the instrument.
Measurement
Under PFRS 9, financial assets, except for FVPL, are measured at fair value plus
transaction costs. The fair value of financial assets is determined using the following
order of priority:

1. Quotation price in an active market

2. Present value of the related cash flows (principal and interest) using an
effective interest rate.
Presentation in the Financial Statements

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Cities of Mandaluyong and Pasig

1. Financial assets at FVPL – current assets

2. Financial assets at FVOCI and FAAC – generally as noncurrent assets,
except when they are due within 12 months from the reporting date.

ADDITIONAL NOTES:
Bonds: Acquired in Between Interest Dates
Steps:
1. Compute for the present value of the bonds on the last interest date (or 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 purchase price, add the nominal interest from the last interest date until
the date of acquisition to the present value – date of acquisition.
Bonds with Interpolation
Financial asset at amortized cost is required to be subsequently measured at
amortized cost using the effective interest method. Since the transaction cost was
included in the initial carrying amount of the financial asset, computation of new
effective interest rate using interpolation is needed, unless the transaction cost
was already considered in determining the new effective rate of interest.
If the acquisition is at a premium, the new effective rate must be lower than the
original effective rate and nominal rate.
If the acquisition is at a discount, the new effective rate must be higher than the
original effective rate and nominal rate.
Serial Bonds
In amortizing for investment in debt securities that is serial bonds – or its payment of
principal has multiple maturities, the collection of principal must be considered in
computing for interest and carrying amount of bonds.
Acquisition of Investment in Bonds with Warrants
When an investment in debt securities is acquired together with warrants, the
company should use the relative fair value to allocate the acquisition cost.

A. Financial Asset at Fair Value Through Profit or Loss

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Cities of Mandaluyong and Pasig

This classification of financial assets includes instruments which are:

1. Held for trading

2. Irrevocably designed at FVPL
3. All other investments in debt securities that do not satisfy the requirements for
measurement at FAAC and FVOCI
Initial Measurement – FVPL
Investment in debt securities classified as FVPL is initially measured at fair value.
Transaction cost is expensed outright.
Subsequent measurement – FVPL
Investment in debt securities classified as FVPL is subsequently measured at fair
value, with changes in fair value included in profit or loss. The formula is as follows:
Fair value (current reporting date) xxx
Less carrying value (FV, previous reporting date) xxx
Unrealized gain (loss) – P&L xxx

The journal entry to record the unrealized gain or loss on fair value changes is:

Unrealized gain Investments in debt securities – FVPL xxx

Unrealized gain – P/L xxx
Unrealized loss Unrealized loss – P/L xxx
Investments in debt securities – FVPL xxx

Derecognition – FVPL
Realized gain or losses on derecognition of financial asset at FVPL is recognized in
profit or loss. The gain/loss is computed as follows:
Consideration received xxx
Less: Interest income of investment sold* (xxx)
Transaction cost (xxx)
Net selling price xxx
Less carrying value (FV of previous reporting date) (xxx)
Realized gain (loss) – P&L xxx

Note: The interest income of investment sold is deducted from the

consideration received if the entity sold the investment in between interest
dates.

The journal entry to record the derecognition of the investment is:

Cash xxx
Loss on sale (if any) xxx
Investment in debt securities – FVPL xxx
Gain on sale (if any) xxx
Interest income or receivable (if any) xxx

B. Financial Asset at Amortized Cost

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Cities of Mandaluyong and Pasig

Investment in debt securities are classified at financial asset at amortized cost when
both of the following conditions are met:
1. The business model is to hold the financial assets in order to collect
contractual cash flows on specified date and
2. The contractual cash flows are solely payments of principal and interest on
the principal amount outstanding

Initial Measurement – FAAC

Investment in debt securities classified as FAAC is subsequently measured at fair
value plus transaction costs.
Bonds maybe acquired thru the following scheme:

Characteristics
Scheme Proceeds (P) vs. Effective Rate (E) vs. Maturity
Face Amount (FA) Nominal Rate (N) Value
At face amount P = FA E=N FA
At a premium P > FA E<N FA
At a discount P < FA E>N FA

Subsequent Measurement – FAAC

Subsequent to initial recognition, investment in bonds classified as financial asset at
amortized cost is measured at amortized cost using effective interest method.
Unrealized gain or loss due to change in fair value is ignored.
Interest Collection
Interest received is computed by multiplying the face value of the bonds and the
nominal rate. The journal entry to record the interest collection and/or accrual is:
Cash/Interest Receivable xxx
Interest Income xxx
Amortization of Premium or Discount
The premium or discount for FAAC is amortized at the end of each reporting period.
The journal entry to record the premium/discount amortization is:

Amortization of Investments in debt securities – FAAC xxx

bond discount Interest income xxx
Amortization of Interest income xxx
bond premium Investments in debt securities – FAAC xxx
Interest Income
Amortization of premium will decrease interest income based on nominal rate while
amortization of discount will increase interest income, thus the interest income during
the period will include the interest received or accrued and the amortization of the
premium or the discount.
Alternatively, interest income may be computed by using the following formula:
Interest income = Present value, beginning of the period x Effective interest
rate

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Derecognition – FAAC
Realized gain or losses on derecognition of financial asset at amortized cost is
recognized in profit or loss. The gain/loss is computed as follows:
Consideration received xxx
Less: Interest income of investment sold* (xxx)
Transaction cost (xxx)
Net selling price xxx
Less amortized cost at the date of derecognition xxx
Realized gain (loss) – P&L xxx

Note: The interest income of investment sold is deducted from the

consideration received if the entity sold the investment in between interest
dates.

The journal entry to record the derecognition of the investment is:

Cash xxx
Loss on sale (if any) xxx
Investment in debt securities – FAAC xxx
Gain on sale (if any) xxx
Interest income or receivable (if any) xxx
Cash (transaction cost) xxx

C. Financial asset at Fair Value through Other Comprehensive Income

Investment in debt securities are classified at financial asset through OCI when both
of the following conditions are met:
1. The business model is achieved both by collecting contractual cash flows and
by selling the financial assets and
2. The contractual cash flows are solely payments of principal and interest on
the principal amount outstanding
Initial Measurement – FVOCI
Investment in debt securities classified as FVOCI is subsequently measured at fair
value plus transaction costs.
Subsequent Measurement – FVOCI
Subsequent to initial recognition, investment in bonds classified as financial asset at
OCI is measured at fair value. However, the amortized cost of the investment will still
be computed using effective interest method. The difference between the fair value
and the amortized cost is the cumulative amount presented in equity.
Journal entries to record amortization of premium or discount and computation of
interest income are actually the same under FAAC and FVOCI. The only difference is
the recognition of changes in fair value under FVOCI.

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Computation of Unrealized Gain or Loss

The following formula should be used to compute unrealized gain or loss in equity:
Fair value – year end xxx
Less: amortized cost – year end xxx
Unrealized gain (loss) in equity – cumulative balance xxx
Less: Unrealized gain (loss) in equity – cumulative balance last year xxx
Unrealized gain (loss) – OCI xxx

The journal entry to record the unrealized gain or loss is:

Unrealized gain Investments in debt securities – FVOCI xxx

Unrealized gain – OCI xxx
Unrealized loss Unrealized loss – OCI xxx
Investments in debt securities – OCI xxx

Interest Income
Interest income under FAAC and FVOCI may be computed in the same way by using
the following formula:
Interest income = Present value, beginning of the period x Effective interest
rate
Derecognition – FAAC
Realized gain or loss on derecognition of financial asset at FVOCI should be
recognized in the profit or loss. However, cumulative gains or losses previously
recognized in OCI are reclassified to profit or loss as provided under PFRS 9. The
formula is as follows:
Consideration received xxx
Less: Interest income of investment sold* (xxx)
Transaction cost (xxx)
Net selling price xxx
Add: Unrealized gain – OCI in equity xxx
Less: Unrealized loss – OCI in equity xxx
Less carrying amount at the date of derecognition xxx
Realized gain (loss) – P&L xxx

OR

Consideration received xxx

Less: Interest income of investment sold* (xxx)
Transaction cost (xxx)
Net selling price xxx
Less amortized cost at the date of derecognition xxx
Realized gain (loss) – P&L xxx

Note: The interest income of investment sold is deducted from the

consideration received if the entity sold the investment in between interest
dates.

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Cities of Mandaluyong and Pasig

The journal entry to record the derecognition of the investment is:

Cash xxx
Unrealized gain – OCI (if any) xxx
Loss on sale – P/L(if any) xxx
Investment in debt securities – FVOCI xxx
Unrealized loss – OCI (if any) xxx
Gain on sale – P/L(if any) xxx
Interest income or receivable (if any) xxx
Cash (transaction cost) xxx

D. Reclassification of Debt Instruments

Reclassification is allowed only when there is a change in business model for
managing its financial assets and applicable only to debt securities.
Examples of change in business model:
1. An entity has a portfolio of commercial loans that it holds to sell in the short
term. The entity acquires a company that manages commercial loans and has
a business model that holds the loans in order to collect the contractual cash
flows. The portfolio of commercial loans is no longer for sale, and the portfolio
is now managed together with the acquired commercial loans and all are held
to collect the contractual cash flows. (FVPL to FAAC)
2. A financial services firm decides to shut down its retail mortgage business.
That business no longer accepts new business and the financial services firm
is actively marketing its mortgage loan portfolio for sale. (FAAC to FVPL)
A reclassification is prohibited under the following circumstances:
1. Change in management intention
2. Temporary disappearance of a particular market
3. Transfer of assets between existing models
Any reclassification shall be treated prospectively from the date of reclassification.
Furthermore, the appropriate reclassification date is the first day of the reporting
period following the change in business model that results in an entity classifying
financial assets.
The following illustration will provide the guide for reclassifications of debt
instruments:

Original New category Accounting Impact

category
Fair value is measured at reclassification date.
Amortized Difference from carrying amount should be
cost FVPL recognized in profit or loss.

Fair value at the reclassification date becomes its

FVPL Amortized new gross carrying amount.
Cost

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A new effective interest rate must be determined

based on the new carrying amount.

Fair value is measured at reclassification date.

Amortized FVOCI Difference from amortized cost should be recognized

cost in OCI.

The original effective interest rate is not adjusted.

Fair value at the reclassification date becomes its
new amortized cost carrying amount.

FVOCI Amortized Cumulative gain or loss in OCI is adjusted against

cost the fair value of the financial asset at
reclassification date.

The original effective interest rate is not adjusted.

Fair value at reclassification date becomes its new
FVPL FVOCI carrying amount.

A new effective interest rate must be determined

based on the new carrying amount.
Fair value at reclassification date becomes carrying
amount.
FVOCI FVPL
Cumulative gain or loss on OCI is reclassified to
profit or loss at reclassification date

E. Impairment Loss on Debt Instruments

The PFRS 9 impairment model for debt securities measures and accounts
impairments in these stages:

Stage 1 – Applied at initial recognition and subsequent measurement when

there is no significant increase in credit risk

a. As soon as a financial instrument is originated or purchased, 12-month expected

credit losses are recognized in profit or loss and a loss allowance is established.
b. Entities continue to recognize 12 month expected losses that are updated at each
reporting date
c. Effective interest is based on the gross carrying amount rather than the carrying
amount net of allowance for impairment.

Stage 2 – Applied at subsequent measurement when there is a significant

increase in credit risk.

a. If the credit risk increases significantly and the resulting credit quality is not
considered to be low credit risk, full lifetime expected credit losses are
recognized.
b. Lifetime expected credit losses are only recognized if the credit risk increases
significantly from when the entity originates or purchases the financial instrument.

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Impairment Flow Chart Guide (PFRS 9)

Measurement of Expected Credit Losses

1. Credit loss is the difference between all contractual cash flows that are due
to an entity in accordance with the contract and all the cash flows that the
entity expects to receive, discounted at the original effective interest rate.
2. Credit risk is the risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge the obligation.
3. Cash shortfall is the difference between contractual cash flow and cash flow
that the entity expects to receive.
In measuring ECL, an entity shall measure ECL of a financial instrument in a way
that reflects:
a. An unbiased and probability-weighted amount that is determined by
evaluating a range of possible outcomes
b. The time value of money
c. Reasonable and supportable information that is available without undue cost
or effort.
Impairment Loss and Gain on Reversal of Impairment
The amount of loss is computed as follows:
Carrying amount xxx
Less: Present value of estimated future cash flows
discounted at original interest rate at initial recognition xxx
Impairment loss (gain) xxx

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OTHER NONCURRENT FINANCIAL ASSETS

Funds for Future Use
Funds are in the form of cash and highly liquid financial instruments, which the entity
holds for specific purposes. Funds may be grouped into:

Fund for Current Operations Funds for Specific Purposes in the

Future that is Non-current
Petty cash fund Plant expansion fund
Change fund Bond sinking fund
Payroll fund Employment retirement fund
Dividend fund Preference share redemption fund
Interest fund Others
Others

For funds that are used in current operations, these are generally classified under cash
and cash equivalents, while noncurrent funds are classified as noncurrent investments.

BOND SINKING FUND

This is a fund set aside for the payment of bonds payable at the maturity date. These
arises because there may be a provision in the bond indenture that the issuing
corporation must set aside a specific amount for the payment of bonds.
CASH SURRENDER VALUE
The entity may enter into a life insurance policy to its officers and name itself as the
beneficiary. The accounting for life insurance premiums will depend on whether the
beneficiary is the entity itself or the officer insured.
When the entity is the designated beneficiary of an insurance policy on the life of an
officer, any premiums paid on the life insurance are recorded as life insurance expense.
The cash surrender value on such policy also accrues to the entity and should be
reported as an asset of the entity.
Cash surrender value is the amount which the insurance firm will pay upon the
surrender and cancellation of the life insurance policy. The cash surrender value is
classified as a noncurrent investment.
LONG-TERM ADVANCES AND DEPOSITS
Long-term advances and deposits such as security deposits, advances on rentals, etc.
fall under the category, loans and receivables which are measured in the statement
position at amortized cost using effective interest method. Thus, at initial recognition,
these are measured at present values based on effective interest rate. Subsequently,
interest income is recognized using the effective rate until the deposits and advances
are used up.

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Guided Exercises / Learning Activities

PRACTICE PROBLEMS:

1. INVESTMENT IN DEBT SECURITIES – FVPL

On January 1, 2020, BREWMASTER, Inc. purchased ₱ 1,000,000 bonds at 98.

The bonds mature on January 1, 2024 and pay 12% annual interest beginning
January 1, 2019. Commission paid on the acquisition of amounted to ₱ 50,000.
The objective of Aurora’s business model is to sell the bonds in the near term to
take advantage of fluctuations in the fair values for short-term profit taking.
On December 31, 2020, the bonds are quoted at 102.

On January 2, 2021, the bonds were sold at 105.

Required:
1. Prepare journal entry for the acquisition.
2. Compute for the unrealized gain or loss on December 31, 2020 and prepare
the journal entries for the unrealized gain and the interest income.
3. Compute for the realized gain or loss on January 2, 2021 and prepare the
journal entry.
ANSWERS:

1. Jan. 1, 2020 Investment in debt securities – FVPL 980,000

Commission expense 50,000
Cash 1,030,000

2. Unrealized G/L on Profit or Loss

Fair value, 12/31/2020 (1.02 x ₱ 1M) 1,020,000
Less carrying value (0.98 x 1M) 980,000
Unrealized gain – P&L 40,000

Dec. 31, 2020 Investment in debt securities – FVPL 40,000

Unrealized gain – P&L 40,000

Cash 120,000
Interest income (₱ 1M x 12%) 120,000

3. Consideration received/net selling price (1M x 1.05) 1,050,000

Less carrying value, 12/31/2020 1,020,000
Realized gain (loss) – P&L 30,000

Jan. 2, 2021 Cash 1,050,000

Investment in debt securities – FVPL 1,020,000
Gain on sale of investment in
debt securities - FVPL 30,000

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Recognition Between Interest Dates

Refer to the same problem but assuming the bonds were acquired on May 1,
2020 plus accrued interest. The interests are payable every March 1 and
September 1.
Required:
1. Prepare journal entry for the acquisition.
2. Compute for the unrealized gain or loss on December 31, 2020 and prepare
the journal entries for the unrealized gain and the interest income.
3. Compute for the realized gain or loss on January 2, 2021 and prepare the
journal entry.
ANSWERS:

1. Jan. 1, 2020 Investment in debt securities – FVPL 980,000

Interest receivable (1M x 12% x 2/12) 20,000
Commission expense 50,000
Cash 1,050,000

2. Unrealized G/L on Profit or Loss

Fair value, 12/31/2020 (1.02 x ₱ 1M) 1,020,000
Less carrying value (0.98 x 1M) 980,000
Unrealized gain – P&L 40,000

Sept. 1, 2020 Cash (1M x 12% x 6/12) 60,000

Interest receivable 20,000
Interest income 40,000

Dec. 31, 2020 Investment in debt securities – FVPL 40,000

Unrealized gain – P&L 40,000

Interest receivable (1M x 12% x 4/12) 40,000

Interest income 40,000

3. Consideration received/net selling price (1M x 1.05) 1,050,000

Interest income of investment sold ( 40,000)
Net selling price 1,010,000
Less carrying value, 12/31/2020 1,020,000
Realized gain (loss) – P&L (10,000)

Jan. 2, 2021 Cash 1,050,000

Loss on sale of investment in
debt securities - FVPL 10,000
Investment in debt securities – FVPL 1,020,000
Interest receivable 40,000

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2. INVESTMENT IN DEBT SECURITIES – FAAC

On January 1, 2020, INVOKER, Inc. purchased 5-year bonds with face value of ₱
4,000,000 and stated interest of 10% per year payable semiannually June 30 and
December 31. The bonds were acquired to yield 8%.

On February 28, 2021, the bonds were sold at 105, including accrued interest.

Required:
1. Compute the initial measurement of the bonds on acquisition.
2. Compute for the interest income for 2020 and carrying amount, current
portion and the noncurrent portion of the investment on December 31, 2020
3. Compute for the carrying amount of the investment on February 28, 2021
prior to sale and compute for the gain or loss on sale of investment upon
derecognition on Feb 28, 2021.
4. Prepare the necessary journal entries from acquisition to derecognition.
ANSWERS:
1. INITIAL RECOGNITION
PV of 1 (₱ 4 M x 0.6756) 2,702,400
PVOA (₱ 4 M x 5% x 8.1109) 1,622,180
Initial PV of bonds 4,324,580

2. SUBSEQUENT RECOGNITION
Amortization table

Date Interest Interest Premium Present

Collection Income Amortization Value
(5%) (4%)
1/1/2020 4,324,580
6/30/2020 200,000 172,983 27,017 4,297,563
12/31/2020 200,000 171,903 28,097 4,269,466
6/30/2021 200,000 170,779 29,221 4,240,245

a. Interest income for 2020 (172,983+171,903) 344,886

b. Carrying amount of investment, 12/31/2020 4,269,466
c. Current portion of investment, 12/31/2020 ZERO
d. Noncurrent portion of investment, 12/31/2020 4,269,466

3. DERECOGNITION
Carrying amount, 12/31/2020 4,269,466
Less: premium amortization (29,221 x 2/6) (9,740)
Carrying amount, 2/28/2021 4,259,726

Total consideration (₱ 4 M x 1.05) 4,200,000

Less: accrued interest (₱ 4 M x 10% x 2/12) 66,667
Net selling price 4,133,333
Less: carrying amount, 2/28/2021 4,259,726
Loss on derecognition – P/L 126,393

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Cities of Mandaluyong and Pasig

4. Journal entries from 1/1/2020 to 2/28/2021

1/1/2020 Investments in debt securities – FAAC 4,324,580
Cash 4,324,580

6/30/2020 Cash 200,000

Interest income 172,983
Investments in debt securities – FAAC 27,017

12/31/2020 Cash 200,000

Interest income 171,903
Investments in debt securities – FAAC 28,097

2/28/2021 Cash 66,667

Interest income (170,779 x 2/6) 56,927
Investments in debt securities – FAAC 9,740

Cash 4,133,333
Loss on sale of investments in
debt securities – FAAC 126,393
Investments in debt securities – FAAC 4,259,726

3. INVESTMENT IN DEBT SECURITIES – FVOCI

On January 1, 2020, KUNKKA, Inc. purchased 5-year bonds with face value of ₱
6,000,000 and stated interest of 10% per year payable annually every December
31. The bonds were acquired for 105. Commission paid for the acquisition
amounted to ₱ 179,125. After considering the transaction cost, the effective rate
of the bond on initial recognition is computed at 8%. The objective of KUNKKA’s
business model is to collect the contractual cash flows and sell financial asset.

The fair value of the investment for the next five years is as follows:
2020 – 110 2021 – 108 2022 – 103 2023 - 101 2024 - 105

On December 31, 2024, the bonds were sold at 102, and the company incurred
transaction costs amounting to ₱ 100,000.

Required:
1. Compute the initial measurement of the bonds on acquisition.
2. Compute for the interest income for 2020 and the carrying amount on
December 31, 2020
3. Compute for the unrealized gain or loss to be recognized in the statement of
financial position and unrealized gain or loss to be recognized in the other
comprehensive income for 2021
4. Compute for the carrying amount of the investment on December 31, 2024
prior to sale and compute for the gain or loss on sale of investment upon
derecognition on December 31, 2024.
5. Prepare the necessary journal entries from acquisition to derecognition.

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ANSWERS:

1. INITIAL RECOGNITION
Fair value (₱ 6 M x 1.05) 6,300,000
Add: Transaction costs 179,125
Initial PV of bonds 6,479,125

2. SUBSEQUENT RECOGNITION
Amortization table and Determination of Unrealized G/L to Equity and OCI

Date Interest Interest Premium Present Fair UG(UL) – UG(UL) – OCI

Collection Income Amorti- Value Value Equity
(10%) (8%) zation
(b) (a) (c = a – b) (d = cCY – cPY)
1/1/2020 6,479,125
12/31/2020 600,000 518,330 81,670 6,397,455 6,600,00 202,545 202,545
0
12/31/2021 600,000 511,796 88,204 6,309,251 6,480,00 170,749 (31,796)
0
12/31/2022 600,000 504,740 95,260 6,213,992 6,280,00 (33,992) (204,741)
0
12/31/2023 600,000 497,119 102,881 6,111,111 6,060,00 (51,111) (17,119)
0
12/31/2024 600,000 488,889 111,111 6,000,000 6,300,00 300,000 351,111
0

a. Interest income for 2020 518,330

b. Carrying amount, 12/31/2020 6,600,000

3. Unrealized gain/loss – Equity, 12/20/2021 170,749

Unrealized gain loss – OCI, 12/20/2021 (31,796)

4. DERECOGNITION

Consideration received (₱ 6 M x 1.02) 6,120,000

Less: Transaction cost 100,000
Net selling price 6,020,000
Add: Unrealized gain – OCI in equity 300,000
Less carrying amount at the date of derecognition (6,300,000)
Realized gain (loss) – P&L 20,000

OR

Consideration received (₱ 6 M x 1.02) 6,120,000

Less: Transaction cost 100,000
Net selling price 6,020,000
Less amortized cost at the date of derecognition 6,000,000
Realized gain (loss) – P&L 20,000

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5. Journal entries from 1/1/2020 to 2/28/2021

1/1/2020 Investments in debt securities – FVOCI 6,479,125
Cash 6,479,125

12/31/2020 Cash 600,000

Interest income 518,330
Investments in debt securities – FVOCI 81,670

Investments in debt securities – FVOCI 202,545

Unrealized gain – OCI 202,545

12/31/2021 Cash 600,000

Interest income 511,796
Investments in debt securities – FVOCI 88,204

Unrealized gain – OCI 31,796

Investments in debt securities – FVOCI 31,796

12/31/2022 Cash 600,000

Interest income 504,740
Investments in debt securities – FVOCI 95,260

Unrealized gain – OCI 170,749

Unrealized loss – OCI 33,932
Investments in debt securities – FVOCI 204,741

12/31/2023 Cash 600,000

Interest income 497,119
Investments in debt securities – FVOCI 102,881

Unrealized loss – OCI 17,119

Investments in debt securities – FVOCI 17,119

12/31/2023 Cash 600,000

Interest income 488,889
Investments in debt securities – FVOCI 111,111

Investments in debt securities – FVOCI 351,111

Unrealized loss – OCI 51,111
Unrealized gain – OCI 300,000

Cash 6,020,000
Unrealized gain – OCI 300,000
Investments in debt securities – FVOCI 6,300,000
Gain on sale of investments in
debt securities – P/L 20,000

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Cities of Mandaluyong and Pasig

4. RECLASSIFICATION OF DEBT INSTRUMENTS

Required: Prepare all the necessary journal entries on the following independent
situations:
1. On January 1, 2020, WINDRANGER, Inc. purchased 5 year, 10% bonds with
a face amount of ₱5,000,000. WINDRANGER acquired the bonds at 120. The
business model of the entity is to sell the financial assets in short term in
order to realize fair value changes.
On December 31, 2020, the entity changed its business model to hold assets
in order to collect contractual cash flows. The fair value of bonds on date of
reclassification is ₱5,331,050.

ANSWER:
Jan 1, 2020 Investment in bonds – FVPL 6,000,000
Cash 6,000,000
Dec 31, 2020 Unrealized loss – P/L 668,950
Investment in bonds – FVPL 668,950
Cash 500,000
Interest income 500,000
Jan 1, 2021 Investment in bonds – FAAC 5,331,050
Investment in bonds – FVPL 5,331,050
New effective rate: 8%

2. On January 1, 2020, DROW RANGER, Inc. purchased 4 year, 10% bonds

with a face amount of ₱5,000,000. Interest is payable annually on December
31. The business model of the entity is to hold financial assets in order to
collect contractual cash flows. The effective rate is 8%.
On December 31, 2020, the entity changed its business model to sell the
financial assets in short term in order to realize fair value changes. The fair
value of bonds on date of reclassification is ₱5,500,000.

ANSWER:
Jan 1, 2020 Investment in bonds – FAAC 5,331,050
Cash (0.7350 x 5M) + (3.3121 x 10% x 5M) 5,331,050

Dec 31, 2020 Cash 500,000

Interest income (5,331,050 x 8%) 426,284
Investment in bonds – FAAC 73,516

Jan 1, 2021 Investment in bonds – FVPL 5,500,000

Investment in bonds – FAAC 5,257,534
Gain on reclassification – P/L 242,466

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 RIZAL TECHNOLOGICAL UNIVERSITY
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3. On January 1, 2020, SNIPER, Inc. purchased 4 year, 10% bonds with a face
amount of ₱5,000,000. Interest is payable annually on December 31. The
business model of the entity is to hold financial assets in order to collect
contractual cash flows. The effective rate is 8%.
On December 31, 2020, the entity changed its business model to sell the
financial assets in short term in order to realize fair value changes and collect
contractual cash flows. The fair value of bonds on date of reclassification is
₱5,500,000.
ANSWER:
Jan 1, 2020 Investment in bonds – FAAC 5,331,050
Cash (0.7350 x 5M) + (3.3121 x 10% x 5M) 5,331,050

Dec 31, 2020 Cash 500,000

Interest income (5,331,050 x 8%) 426,284
Investment in bonds – FAAC 73,516
Jan 1, 2021 Investment in bonds – FVOCI 5,500,000
Investment in bonds – FAAC 5,257,534
Gain on reclassification – OCI 242,466

4. On January 1, 2020, BEASTMASTER, Inc. purchased 4 year, 10% bonds

with a face amount of ₱5,000,000. BEASTMASTER acquired the bonds at
5,331,050 including transaction costs. The business model of the entity is to
hold financial assets in order to collect contractual cash flows. The effective
rate is 8%.
On December 31, 2020, the fair value of the bonds is 110. The entity changed
its business model to sell the financial assets in short term in order to realize
fair value changes and collect contractual cash flows. The fair value of bonds
on date of reclassification is ₱5,500,000.
ANSWER:
Jan 1, 2020 Investment in bonds – FVOCI 5,331,050
Cash 5,331,050
Dec 31, 2020 Cash 500,000
Interest income (5,331,050 x 8%) 426,284
Investment in bonds – FVOCI 73,516
Investment in bonds – FVOCI 242,466
Unrealized gain – FVOCI 242,466

Date Interest Interest Premium Present Fair UG(UL) – UG(UL) – OCI

Collection Income Amorti- Value Value Equity
(10%) (8%) zation
(b) (a) (c = a – b) (d = cCY – cPY)
1/1/2020 5,331,050
12/31/2020 500,000 426,284 73,516 5,257,534 5,500,00 242,466 242,466
0

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

Jan 1, 2021 Investment in bonds – FAAC 5,500,000

Investment in bonds – FVOCI 5,500,000

Unrealized gain – OCI 242,466

Investments in bonds - FAAC 242,466

5. On January 1, 2020, CRYSTAL MAIDEN, Inc. purchased 5 year, 10% bonds

with a face amount of ₱5,000,000. CRYSTAL MAIDEN acquired the bonds at
120. The business model of the entity is to sell the financial assets in short
term in order to realize fair value changes.
On December 31, 2020, the entity changed its business model to hold assets
in order to collect contractual cash flows and sell the financial assets. The fair
value of bonds on date of reclassification is ₱5,331,050.
ANSWER:
Jan 1, 2020 Investment in bonds – FVPL 6,000,000
Cash 6,000,000
Dec 31, 2020 Unrealized loss – P/L 668,950
Investment in bonds – FVPL 668,950
Cash 500,000
Interest income 500,000
Jan 1, 2021 Investment in bonds – FVOCI 5,331,050
Investment in bonds – FVPL 5,331,050
New effective rate: 8%

6. On January 1, 2020, NECROPHOS, Inc. purchased 4 year, 10% bonds with a

face amount of ₱5,000,000. NECROPHOS acquired the bonds at 5,331,050
including transaction costs. The business model of the entity is to hold
financial assets in order to collect contractual cash flows. The effective rate is
8%.
On December 31, 2020, the entity changed its business model to sell the
financial assets in short term in order to realize fair value changes. The fair
value of bonds on date of reclassification is ₱5,600,000.

ANSWER:
Jan 1, 2020 Investment in bonds – FVOCI 5,331,050
Cash 5,331,050
Dec 31, 2020 Cash 500,000
Interest income (5,331,050 x 8%) 426,284
Investment in bonds – FVOCI 73,516
Investment in bonds – FVOCI 242,466
Unrealized gain – FVOCI 242,466

Date Interest Interest Premium Present Fair UG(UL) – UG(UL) – OCI

Collection Income Amorti- Value Value Equity
(10%) (8%) zation
(b) (a) (c = a – b) (d = cCY – cPY)
1/1/2020 5,331,050
12/31/2020 500,000 426,284 73,516 5,257,534 5,500,00 242,466 242,466

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Jan 1, 2021 Investment in bonds – FVPL 5,600,000

Investment in bonds – FVOCI 5,500,000
Gain on reclassification – P/L 100,000

Unrealized gain – OCI 242,466

Unrealized gain – P/L 242,466

5. IMPAIRMENT OF DEBT SECURITIES

On January 1, 2019, RIKIMARU Company purchased 5-year bonds with face amount
of ₱ 2,000,000 and stated interest of 12% payable every December 31. The bonds
were acquired at ₱ 2,126,776 to yield rate of 10%.
On December 31, 2020, after receiving the interest, the issuer of bonds is in financial
difficulty due to the COVID-19 pandemic. RIKIMARU assessed that investment’s
credit risk and it is probable that an impairment loss should be recognized.
RIKIMARU assessed also that only the principal amount will be received on the
maturity date. The prevailing interest on this date is 11%.
On December 31, 2021, the financial condition of the borrower has improved, and it
can pay its unpaid obligation including principal and interest at maturity. The
prevailing rate of interest on this date is 12%.
Required: Compute for the following under PFRS 9:
a. Impairment loss on December 31, 2020
b. Carrying amount on December 31, 2020
c. Interest income on 2021
d. Gain on reversal of impairment in 2021.
e. Carrying amount on December 31, 2021
f. Interest income in 2022.

ANSWERS:
ORIGINAL AMORTIZATION TABLE

Date Interest Interest Premium Present

Collection Income Amortization Value
(12%) (10%)
1/1/2019 2,126,776
12/31/2019 240,000 212,678 27,322 2,099,454
12/31/2020 240,000 209,945 30,055 2,069,399
12/31/2021 240,000 206,940 33,060 2,036,339
12/31/2022 240,000 203,634 36,366 2,000,000

a. Carrying amount, 12/31/2020 2,069,399

Less: PV of expected cash flows using original
rate (₱2M x .8264) 1,652,800
Impairment loss 416,599

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 RIZAL TECHNOLOGICAL UNIVERSITY
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b. Carrying amount, 12/31/2020 = PV of

expected cash flows 1,652,800

c. REVISED AMORTIZATION TABLE

Date Interest Income (10%) Present Value
12/31/2020 1,652,800
12/31/2021 165,280 1,818,080
12/31/2022 181,808 2,000,000
Interest income for 2021 165,280
d. Principal 2,000,000
Add: accrued interest (₱2M x 12% x 2 years unpaid interest) 480,000
Total 2,480,000
Multiply by: PV of 1 using OEIR 0.9091
Total PV of future cash inflows 2,254,568
Less: amortized cost, 12/31/2021 1,818,080
Gain on reversal of impairment 436,488

e. Carrying amount, 12/31/2021 = PV of

expected cash flows 2,254,568

f. Interest income for 2022 203,634

Use again the original amortization table.

Date Interest Interest Premium Present

Collection Income Amortization Value
(12%) (10%)
1/1/2019 2,126,776
12/31/2019 240,000 212,678 27,322 2,099,454
12/31/2020 240,000 209,945 30,055 2,069,399
12/31/2021 240,000 206,940 33,060 2,036,339
12/31/2022 240,000 203,634 36,366 2,000,000

Let us illustrate the journal entries starting from the impairment loss up to
2022:

12/31/2020 Impairment loss 416,599

Allowance for impairment loss 416,599

12/31/2021 Investment in debt securities 165,280

Interest income 165,280

Allowance for impairment loss 436,488

Gain on reversal of impairment 436,488

12/31/2022 Cash 240,000

Investment in debt securities 36,366
Interest income 203,634

Cash 2,000,000
Investment in bonds 2,000,000

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

6. FUNDS FOR FUTURE USE

BOND SINKING FUND
On January 1, 2020, SNAPFIRE COMPANY issued ₱1M bonds that will mature on
December 31, 2022.
According to the agreement, the entity is required to maintain a separate bank
account and make a periodic deposit every December 31 that will accumulate at
least ₱1M at December 31, 2022. The market rate being paid by bank on the
deposits is 10% yield net of tax.
Required: Compute the carrying amount of the fund until December 31, 2022 and
prepare journal entries.

1. Compute for the required annual deposit by dividing the required ending
balance of the sinking fund by future value of ordinary annuity.

Required balance of the sinking fund at bond maturity 1,000,000

Divide by future value at OA 3.31
Required annual deposit 302,115

2. Compute for the carrying amount of bond sinking fund until 2024.
TABLE FOR ACCUMULATION OF FUND BALANCE

Date Deposit Interest Income Premium

(10%) Amortization
12/31/2020 302,115 - 302,115
12/31/2021 302,115 30,212 634,442
12/31/2022 302,115 63,444 1,000,000

3. Journal Entries related to Bond Sinking Fund

12/31/2020 Bond sinking fund 302,115
Cash 302,115

12/31/2021 Bond sinking fund 332,327

Interest income 30,212
Cash 302,115

12/31/2022 Bond sinking fund 365,559

Interest income 63,444
Cash 302,115

CASH SURRENDER VALUE

PUDGE COMPANY insured the life of its president, Ms. Lina, for ₱ 5,000,000 the
entity being the beneficiary of an ordinary life policy. The annual premium is ₱

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

50,000. The policy is dated January 1, 2020 and carried the following cash surrender
value.

End of policy year Cash surrender value

2020 0
2021 0
2022 100,000
2023 250,000
2024 300,000

Ms. Lina died on July 1, 2024 and the policy was collected on August 1, 2024.

Required: Prepare journal entries for the transactions occurred above.

ANSWERS:

1/1/2020 Life insurance expense 50,000

Cash 50,000

1/1/2021 Life insurance expense 50,000

Cash 50,000

1/1/2022 Life insurance expense 50,000

Cash 50,000

12/31/2022 Cash surrender value 100,000

Life insurance expense (1/3) 33,333
Retained earnings 66,667

1/1/2023 Life insurance expense 50,000

Cash 50,000

12/31/2023 Cash surrender value (250,000 – 100,000) 150,000

Life insurance expense 150,000

1/1/2024 Life insurance expense 50,000

Cash 50,000

7/1/2024 Cash surrender value 25,000

Life insurance expense 25,000
[(300,000 – 250,000) x 6/12]

8/1/2024 Cash 5,000,000

Cash surrender value 275,000
Life insurance expense (50,000 x 6/12) 25,000
Gain on life insurance settlement (BF) 4,700,000

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

Assessment

Provide the requirement for the following

problems. Provide the solutions as necessary. For problems that require the
determination of present value factors, round off your answer to four decimal

1. On January 1, 2020, VIPER COMPANY purchased 12% bonds with face

amount of ₱ 5,000,000 for ₱ 5,380,000 and it has an effective yield of 10%.
Interest are payable annually on December 31 of each year. The bonds are
quoted at 120 on December 31, 2020 and 115 on December 31, 2021. The
business model of VIPER is to trade or sell the financial assets.

Required: Prepare all journal entries for 2020 and 2021 applicable to this
transaction.

2. On January 1, 2021, RUBICK COMPANY acquired 5-year, 15%, ₱ 8,000,000

H-bonds. The investments were acquired at a price to yield 14%. Interest are
payable annually on December 31. RUBICK’s business model is to hold the
financial assets in order to collect contractual cash flows.
a. Determine the initial measurement of H-bonds on January 1, 2021.
b. Prepare a schedule of amortization using the effective interest method.
Use the following columns:

Date Interest Interest Amortization Present

Collection Income Value

c. Prepare all journal entries for 2021 and 2022 applicable to this
transaction.

3. On January 1, 2022, HUSKAR COMPANY purchased bonds with a face

amount of ₱ 5,000,000 at a cost of ₱ 5,200,000. The stated interest is 10%
payable annually every December 31. The bonds mature in December 31,
2025. business model is to hold the financial assets in order to collect
contractual cash flows.

a. Compute for the interest income for the current year.

b. Prepare journal entries for the current year.

4. Refer to Problem #3. Assuming on December 2022, HUSKAR changed its

business model from holding the financial assets in order to collect
contractual cash flows to realizing gains. The fair value of the bonds on the
reclassification date is 105.

Required: When will HUSKAR recognize the reclassification gain or loss and
compute the amount of reclassification gain or loss. Prepare the journal entry
to record the reclassification of bonds.

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 RIZAL TECHNOLOGICAL UNIVERSITY
Cities of Mandaluyong and Pasig

5. On January 1, 2020, KUNKKA, Inc. acquired 10%, 3-year bonds with face
value of ₱ 2,000,000. Interest is payable semiannually every June 30 and
December 31. The bonds were acquired for 104. Commission paid for the
acquisition amounted to ₱ 54,670. After considering the transaction cost, the
effective rate of the bond on initial recognition is computed at 8%. The
objective of KUNKKA’s business model is to collect the contractual cash flows
and sell financial asset.

The fair value of the investment for the next periods are the following:
6/30/2020 105 6/30/2021 102 6/30/2022 108
12/31/2020 101 12/31/2021 112 12/31/2022 120
On January 1, 2021, the bonds were sold at 107, and the company incurred
transaction costs amounting to ₱ 20,000.

Required:
a. Compute the initial measurement of the bonds on acquisition.
b. Compute for the interest income for 2020 and the carrying amount on
December 31, 2020.
c. Compute for the unrealized gain or loss to be recognized in the
statement of financial position and unrealized gain or loss to be
recognized in the other comprehensive income for 2020.
d. Compute for the amount of realized gain or loss to be recognized in the
profit or loss section.
e. Prepare journal entries for the current year.

6. On January 1, 2020, MIRANA COMPANY issued Php 15M bonds that is due
on December 31, 2029. The bond indenture stated that the entity must
establish a bond sinking fund in relation to the borrowing agreement. The
entity set up a bank account for deposits on bond sinking fund. It was decided
that deposits will be made every June 30 and December 31 starting June 30,
2019. The company expects to an average interest of 8% net of tax on this
investment.

a. How much MIRANA will deposit every payment period to accumulate the
target the Php 15 M at December 31, 2029.
b. Prepare journal entries for the current year in relation to the bond sinking
fund.

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Cities of Mandaluyong and Pasig

INTERMEDIATE ACCOUNTING PART 1 29