Debt Security – is any security that represents a creditor relationship with an entity

Characteristics of Debt Securities:

1. Maturity Value (Face Value)
2. Periodic payment of interest
3. Maturity Date

Example of Debt Security

Bond – a formal unconditional promise made under seal to pay a specified sum of money at a determinable
future date, and to make periodic interest payments at a stated rate until the principal sum is paid

Bondholder (creditor) – investment in bond

Issuer (debtor) – bonds payable

NOTE: Acquisition of Bond Investment can be:

A. On Interest Date – no accounting problem because the purchase price is initially recognized as
acquisition cost
B. BETWEEN Interest Date – purchase price NORMALLY Includes ACCRUED INTEREST.

Measurement of Debt Securities: Fair Value through Profit or Loss

1. Held for Trading
2. Irrevocable Designation to FVPL
3. Fair Value Option

Helpful Formula on Debt Securities – FVPL

At Initial Measurement (Accrued Interest Receivable only shows on Between Interest Date)

1. Investment ∈Bonds=Face Amount ×Quoted Price %

Months last Interest
2. Accrued Interest Receivable=( Face Amount × Nominal Rate ) ×
12

On Selling the (Portion of) Bonds

Face Value Sold
1. Carrying Amount of Bond Sold=Fair Value of Bonds ×
Total Face Value
2. Sale Price of Bond=Face Value Sold ×Quoted Price%
Months Passed
3. Accr ued Interest of Sold Bond= Annual Interest of Sold Bond ×
12
4. Total Cash Received=Sale Price of Bond+ Accrued Interest

On Subsequent Measurement
1. Remaining Face Value of Bond=Total Face Value−Face Value Sold if any
2. Fair Value at End of year =Face Value of Bond ×Quoted Price %
NOTE: Face Value of Bond can be the Remaining Face Value of Bond
3. Remaining Carrying Amount=Total Carrying Amount−Carryingamount of Bond Sold
4. Unrealized Gain∨Loss=Fair Value at End of year −Carrying Amount of Bond
NOTE: Carrying Amount of Bond can be the Remaining Carrying Amount
Unrealized Gain = Fair Value > Carrying Amount of Bond
Unrealized Loss = Fair Value < Carrying Amount of Bond
Initial Measurement: Fair Value
Directly Attributable Transaction cost are EXPENSED

INITIAL ENTRY: (Interest Income shows only on acquisition BETWEEN interest date)
NOTE: Interest Income is used on Accrued Interest “Income Account” to be not confused and more
convenient
Investment in Bonds -
FVPL xx
EXPENSES xx
Interest Income xx
Cash xx

Entry for Interest Received:

NOTE: Accrued Interest from Initial Measurement is reversed in this Entry if it is acquired BETWEEN
interest dates
Cas
h xx
Interest Income xx

ENTRY for SALE OF BONDS:

Cash xx
Loss On Sale of Bond xx
Investment in Bonds - FVPL xx
Interest Income xx
Gain on Sale of Bond xx

Sale Price xx
Carrying Amount of Sold Bond (xx)
Gain (Loss) on Sale of Bond xx(xx)

ENTRY for the END OF THE YEAR (to be Reversed next year)

31-Dec Accrued Interest Receivable xx

Interest Income xx

1-
Jan Cash xx
Accrued Interest Receivable xx

Subsequent Measurement: Fair Value

Investment in Bonds - FVPL xx Unrealized Loss xx
Unrealized
Gain xx Investment in Bonds - FVPL xx

Face Value xx
Remaining Carrying Amount (xx)
Unrealized Gain (Loss) xx(xx)
NOTE: This is Acquisition of bonds BETWEEN Interest dates

IMPORTANT NOTE: Amortization of Premium or Discount

1. Amortization of Bond DISCOUNT

Investment in
Bonds xx
Interest Income xx

The reason is that the discount is a GAIN on the part of bondholder

Nominal Rate < Effective Interest Rate = Discount, which is addition to present value in amortization table

EXAMPLE: Face Amount = 5,000,000; Nominal Rate = 10%; Cost of Bond = 4,760,000; Effective Rate = 12%
Amortization Table
Interest
Date Received Interest Income Amortization Carrying Amount
1-Jan-19 4,760,000.00
Dec 31 2019 500,000.00 571,200.00 71,200.00 4,831,200.00
Dec 31 2020 500,000.00 579,744.00 79,744.00 4,910,944.00
Dec 31 2021 500,000.00 589,056.00 89,056.00 5,000,000.00
NOTE: There is 257.28 immaterial in computation which is deducted

2. Amortization of Bond PREMIUM

Interest Income xx
Investment in
Bonds xx

The reason is that the premium is a LOSS on the part of bondholder

Nominal Rate > Effective Interest Rate = Premium, which is deduction to present value in amortization table

EXAMPLE: Face Amount = 1,000,000; Nominal Rate = 12%; Cost of Bond = 1,049,740; Effective Rate = 10%
Amortization Table
Date Interest Received Interest Income Amortization Carrying Amount
1-Jan-19 1,049,740.00
31-Dec-19 120,000.00 104,974.00 15,026.00 1,034,714.00
31-Dec-20 120,000.00 103,471.40 16,528.60 1,018,185.40
31-Dec-21 120,000.00 101,814.60 18,185.40 1,000,000.00
NOTE: There is 3.94 immaterial in computation which is deducted

NOTE: Nominal Rate and Effective Rate are equal if FACE AMOUNT is Equal to Cost of BOND
INVESTMENT

OTHER NOTE ON INTEREST RATES:

A. If the problem is Semi-annual
 Rate B. If the problem is Quarterly
1. Semiannual rate= Rate
2
1. Quarterly rate=
2. Semiannual period=Life of Bond × 2 4

Quarterly period=Life of Bond ×4 NOTE: Rate are both Nominal and Effective Interest Rate, and this are
also used to compute for TIME VALUE of the Money

4. Held for Collection of Contractual cash flows and for trading of Financial Asset: Fair Value through
Other Comprehensive Income

Helpful Formula on Debt Securities – FVOCI

At Initial Measurement
1. Investment ∈Bonds=( Face ×Quote d Price % ) +Transaction Cost
Months last Interest
2. Accrued Interest Receivable=( Face Amount × Nominal Rate ) ×
12

At Subsequent Measurement
1. Interest Received=Face Value × Nominal Rate
2. Interest Income=Carrying Amount × Effective Interest Rate
3. Amortization=Interest Income−Interest Received
4. Carrying Amount for the year ( if DISCOUNT )=Carrying Amount Last year + Amortization
5. Carrying Amount for the year ( if PREMIUM )=Carrying Amount Last year −Amortization
6. Fair Value of Bonds end of the year =Face Value×Quoted Price %
7. Unrealized Gain∨Loss=FV of Bonds end of the year −Carrying Amount for the year

IF the Problem Continues for the Following Years

8. Investment Balance per Book=Fair Value Last year + Discoun t∨−Premium Amortization
9. Unrealized Gain∨Loss=FV of Bonds end of the year −Investment Balance per book

On Selling the Bond

1. Selling Price=Face Amou nt ×Quoted Price %
2. Total Sale Price=Selling Price+Cumulative Unrealized Gain∨−Unrealized Loss
3. Gain∨Loss on Sale of Investment=Total Sale Price−Investment Balance per Book
Months Passed
4. Accrued Interest =Annual Interest ×
12
Months Passed
5. Amortization= Annual Amortization ×
12
6. Investment Balance per Book=Fair Value Last Year ± Amortization
NOTE: Plus Amortization is DISCOUNT; Minus Amortization is PREMIUM
7. Total Cash Received=Selling Price+ Accrued Interest

Initial Measurement: Fair Value plus Directly Attributable Transaction Cost

INITIAL ENTRY: (Interest Income shows only on acquisition BETWEEN interest date)
NOTE: Interest Income is used on Accrued Interest “Income Account” to be not confused and more
convenient
Investment in Bonds - xx
 FVPL
Interest Income xx
Cash xx

Entry for Interest Received:

NOTE: Accrued Interest from Initial Measurement is reversed in this Entry if it is acquired BETWEEN
interest date
Cas
h xx
Interest Income xx

Entry for Amortization of Interest

DISCOUNT: PREMIUM:
Investment in Bonds -
FVOCI xx Interest Income xx
x Investment in Bonds - x
Interest Income x FVOCI x

SUBSEQUENT MEASURMENT ENTRY:

Computation of Unrealized Gain or Loss
Face xx
Multiply by: Quoted Price xx%
Fair Value xx
Carrying Amount per
table (xx)
Unrealized Gain (Loss) xx(xx)

ENTRY for Unrealized Gain or Loss

Investment in Bonds - Unrealized Loss -
FVOCI xx OCI xx
Unrealized Gain - x Investment in Bonds - x
OCI x FVOCI x

Unrealized Gain xx
Unrealized Loss (xx)
Cumulative Unrealized
Gain/(Loss) xx(xx)

Computation of Gain or Loss on SALE

Face xx
Quoted Price at Sale xx%
Selling Price xx
Cumulative Unrealized Gain/(Loss) xx(xx)
Total xx
Fair Value last year xx
Amortization Discount (Premium) xx(xx) (xx )
Gain (Loss) on Sale of Bonds xx(xx)

Cash xx
Unrealized Gain - OCI xx
Loss on Sale of Bonds xx
Investment in Bonds -
FVOCI xx
Unrealized Loss - OCI xx
Gain on sale of bonds xx
Interest Income xx

NOTE: Unrealized Gain or Loss is the CUMULATIVE UNREALIZED GAIN/LOSS account, which is
reclassified to PROFIT or LOSS on disposal

5. Held for Collection of Contractual Cash Flows: at Amortized Cost

Helpful Formula on Debt Securities – at Amortized Cost

At Initial Measurement (Accrued Interest Receivable only shows on Between Interest Date)

1. Investment ∈Bonds=Face Amount ×Quoted Price %

Months last Interest
2. Accrued Interest Receivable=( Face Amount × Nominal Rate ) ×
12

At Subsequent Measurement
1. Interest Received=Face Value × Nominal Rate
2. Interest Income=Carrying Amount × Effective Interest Rate
3. Amortization=Interest Income−Interest Received
4. Carrying Amount for the year ( if DISCOUNT )=Carrying Amount Last year + Amortization
5. Carrying Amount for the year ( if PREMIUM )=Carrying Amount Last year −Amortization

On Selling the Bond

1. Selling Price=Face Amount ×Quoted Price%
2. Gain∨Loss on Sale of Investment=Selling Price−Carrying Amount per Table
Months Passed
3. Accrued Interest =Annual Interest ×
12
Months Passed
4. Amortization= Annual Amortization ×
12
5. Carrying Amount per Table=Carrying Amount for the year ± Amortization
NOTE: Plus Amortization is DISCOUNT; Minus Amortization is PREMIUM
6. Total Cash Received=Selling Price+ Accrued Interest

Initial Measurement: Fair Value plus Directly Attributable Transaction Cost

INITIAL ENTRY: (Interest Income shows only on acquisition BETWEEN interest date)
NOTE: Interest Income is used on Accrued Interest “Income Account” to be not confused and more
convenient
Investment in Bonds -
FVPL xx
Interest Income xx
Cash xx

Entry for Interest Received:

NOTE: Accrued Interest from Initial Measurement is reversed in this Entry if it is acquired BETWEEN
interest dates
Cas
h xx
Interest Income xx

Entry for Amortization of Interest

DISCOUNT: PREMIUM:
Investment in Bonds -
FVOCI xx Interest Income xx
x Investment in Bonds - x
Interest Income x FVOCI x

Computation of Gain or Loss on SALE

Face xx
Quoted Price xx%
Selling Price xx
Carrying Amount for the year xx
Amortization Discount (Premium) xx(xx) xx(xx)
Gain (Loss) on Sale of Bonds xx(xx)

Cash xx
Loss on Sale of Bonds xx
Investment in Bonds xx
Gain on sale of
bonds xx
Interest Income xx

OTHER ISSUES IN DEBT SECURITIES AT AMORTIZED COST

A. Straight Line Method of Amortization

Total Discount∨Premium
1. Straight Line Amortization=
Life of Bond

B. Bond Outstanding Method of Amortization

 1. Bond Outstanding=Face Amount of Bonds−Cumulative Annual Installment
Bond Outstanding for the year
2. Fraction of Bond=
Total Bond Outstanding
3. Amortization for the year =Bond Outstanding for the year × Fraction of Bond for the year

C. Effective interest Method of SERIAL BONDS

1. Interest Received=Face Amount × Nominal rate

2. Interest Income=Carrying Amount × Effective Rate
3. Amortization=Interest Received−Interest Income
4. Car rying Amount=Carrying Amount Last year− Annual Installment ± Amortization
NOTE: Plus Amortization is DISCOUNT; Minus Amortization is PREMIUM

D. Market Price of the Bond (Initial Measurement)

Face Amount × PV of 1 xx
Interest Received × PV of Ordinary Annuity of 1 xx
Present Value of Bond at Initial Measurement xx

E. Subsequent Measurement Without quoted Price - FVPL

Face Amount × PV of 1 xx
Interest Received × PV of Ordinary Annuity of
1 xx
Fair Value of Bond for the year xx
NOTE: Period – Year Passed is used to compute for the Present Value of 1 and use of MARKET VALUE
Percentage for the year
Debt Securities FVPL FVOCI Amortized Cost
Initial Measurement Fair Value Cost = Fair Value + Transaction Cost
Transaction Cost Expensed Capitalized
Face Value * Nominal Carrying Amount * Effective Interest
Interest Income
Rate% Rate%
Interest Receivable (Accrued Face Amount * Nominal Rate * (Month from last interest
Interest) payment/12)
Year end Valuation Fair Value Carrying Amount
Changes in Fair Value Profit and Loss OCI NONE
Financial Statement Presentation Current Asset Non Current asset
Disposal Profit and Loss