Chapter 5

Trade and Other Receivables

December 31,2022 Pl.750.000

December 31,2023 2,000,000 Debt Investments
December 31,2024
Total

<* Learning Outcomes

The present value factors at 10% are as follows:
1 period - 0.909; 2 periods - 0.826; 3 periods - 0.751 After reading this chapter, you should be able to:

(46) How much is the impairment loss on the receivables? (a) define investments;
a. P943,000 (b) define investments in debt securities and give examples;
b. P455J00 (c) measure debt investments at the date ofinitial recognition;
c. P443,000 (d) account for transactions affecting debt investments subsequent to
d. PO acquisition;
(e) measure debt investments at the end ofthe reporting period;
(47) How much is the interest revenue reported for the year ended December 31. (f) acquire proficiency and accuracy in answering theoretical questions and
2022? solving problems relating investments in debt securities.
a. P550.000
b. P455,700
*> Investment Defined
c. P375.000
d. PO
> An asset held by an enterprise for purposes of accretion of wealth through
distribution of interest, royalties, dividends, and rentals or for capital
On December 31, 2021, the Metro Finance Company had a P5,000,000 note appreciation or other benefits to be obtained.
receivable from Multi Company. The note bears 10% interest. The books
reported accrued interest of PSOO.OOO on this date. Because of financial distress > Asset that is not directly related to the central revenue producing activities of
being suffered by Multi Company, Metro Finance agreed to the restructuring and the enterprise but are acquired for any of the following purposes:
modification of the terms as follows: • For other sources ofincome
• Reduction of principal amount to P4,000,000; • To establish long-term relationship with suppliers and customers
• Reduction of interest to 8% payable annually beginning December 31, 2022; • • To acquire control or significant influence over another company
« Accrued interest on December 31,2021 is condoned; and • To accumulate funds for future use
• Principal payment was reset to December 31, 2024. • For^appreciation in value
(48) How much is the impairment loss recognized by Metro Finance on December > Investments are expected to contribute to the success of the business either by
31.2021 as a resultofthe restructuring? exercising certain favorable effects upon sales and operations or by making an
a. P 300,000 independent contribution to earnings over the long term.
b. P 540,000
c. PI,500,128
Debt Investments
d. PI,698,992

(49) At what amount should the restructured notes receivable be reported at > Investments in financial instruments issued by an entity that typically have
December 31,2022? (a) a maturity value;(b) an interest rate and (c) a maturity date.
a P3,801,008
b. P3,861,109 Classes of debt investments
c. P4,000,000
d. P5,000.000 > The classification of debt securities shall be made on the basis of both (1),
the business model for managing the financial asset; and (2)the contractual
.

cash flow characteristics of the financial asset. Classification is as follows:

• debt investments at amortized cost (called as held to maturity

securities or HTM under PAS 39)
Chapter6 Chapter 6
Debt Investments
Debt Investments

debt investments at fair value through profit or loss The bonds price is computed as follows:
debt investments at fair value through other comprehensive income
Discounted value of maturity value (1,000,000 x 0.620921] P 620,921
Examples are bond certificates and treasury notes issued by private Discounted value of interest payments
enterprises or a government agency guaranteeing payment of a principal (1,000,000 X 12% X 3.790787) 454.894
amount and interest at specified future date. Total

Accrued Interest on Debt Securities at Time of Purchase

Alternative computation:

Premium or Discount
Accrued interest arises in the accounts vi^hen debt securities are purchased
at any time between the interest dates. Face value of bonds x difference in periodic interest rate x PVAF
P1,000,000 X 2% X 3.790786 = 75,816(premium,since stated interest
Assume interest dates are January 1 and July 1 and the bonds were rate is greater than market interest rate)
acquired on March 1. Accrued interest is computed for two months
Bond Price
Oanuary 1 to March 1).
Face value + Premium (or - discount)
Assume interest dates are January 1 and July 1 and the bonds were PI,000,000 + P75,816 = 1,075,816 (difference is due to rounding off)
acquired on September 1. Accrued interest is computed for two
months (July 1 to September IJ. DEBT INVESTMENTS AT AMORTIZED COST

Accrued interest is excluded in the cost of the debt investment and is Initial recognition
recorded separately in an interest receivable or interest revenue account.
Debt investments at amortized cost are initially recognized at purchase
price which is the fair value at the date ofacquisition plus transaction costs
Determining Initial Cost/Purchase Price ofDebt Securities
that are directly attributable to their acquisition.
Any quotation for the debt security is expressed as a percentage of its face
Measurement After Initial Recognition
value. Thus,if PI,000,000 bond is quoted at 95,its bond price is P950,000;
if P1,000,000 bond is quoted at 105,its bond price is Pl,050,000. At interest dates and at reporting dates, any premium or discount is
amortized using the effective interest method.
Purchase of debt investments atless than face value,resulting to a discount,
indicates that the bond's stated interest rate is less than the prevailing > Effective Interest Method of Amortization
market rate* whereas purchase at more than face value, resulting to a
premium indicates that the bond's stated interest rate is greater than the Amortization of premium decreases the carrying amount of the debt
prevailing market rate. Apparently,the bonds are purchased at face value investment and the interest revenue (based on nominal rate) while
if the bond's stated interest rate and market rate are the same. amortization of discount increases the carrying amount of the debt
investment and the interest revenue (based on nominal rate).
The bond price or market price is determined by discounting the maturity
value ofthe bond and each remaining interest payments at the market rate Effective interest method provides an increasing amount of
of interest for similar debt on that date.
amortization periodically. Likewise, it provides a constant rate of
return on debt investment carrying amount from period to period.
Assume the following data for Bond Corporation:
If the securities are held until maturity, the carrying amount will be
Face value of bonds - Pl.OOO.OOO; Stated rate of interest - 12o/o; equal to its face value after appropriate amortizations are made.
Effective (market) rate of interest - 10"/o: Term - 5 years; Date of purchase -
January 1,2016. Interest is payable every December 31 and the company uses (Premium Situation) Using the given data for Bond Corporation an
the calendar year that ends on December 31- amortization table is presented on the next page for the five-year term of the
Present value
Present value of
or 1 at 10%
1 at J.UVO for S periods (PVF)-0.620921. debt investment. Assume further that quotations for the bond on December 31,
.. -t .*4- 1 AflA c
2021 and December 31,2022 are 105 and 104,respectively.
Present value of an ordinary annuity of 1 at 10% forS periods(PVAF)
-3.790787.

126
127

i.
Chapter6 Chapter 6
DebtInvestments Debt Investments

The receipt of the first two annual interest and premium amortization Bond Price - ^ .
are recorded as follows(Please refer to the amortization table for the amounts]: Face value + Premium (or - discount] ^
P1,000,000 - P72,095 = 927,905
December 31,2021
The receipt of the first two annual interest and discount amortization are
Cash 120,000 recorded as follows (refer to the aniortizatioh table for the amounts]:
Interest Revenue 107,581
DebtInvestment atAmortized Cost 12,419 December 31,2021

December 31,2022 Cq^h 100,000

Debt Investment at Amortized Cost 11,349
Cash ' 120,000 Interest Revenue ■ i 111,349
Interest Revenue 106,340
DebtInvestment atAmortized Cost 13,660 V.December 31,2022

Cash 100,000
AMORTIZATION TABLE
, Debt Investment at Amortized Cost 12,710
Interest Interest Effective Amorttof Carrying Interest Revenue . 112,710
Date Due Interest Premium Amount
01/01/21 '
'. *■ * .■
1,075,815 AMORTIZATION TABLE

12/31/21 120,000 107,581 12,419 1,063,396

Interest Interest Effective Amort of Carrving
12/31/22 120,000 106,340 13,660 . 1,049,736
, Date Due Interest Discount Amount
12/31/23 120,000 104,974 15,026 1,034,710
01/01/21 927,905
12/31/24 120,000 103,471 16,529 1,018,181
12/31/21 100,000 111,349 11,349 • 939,254
12/31/25 120,000 101,819 18,181 1,000,000
12/31/22 100,000 112,710 12,710 951,964
12/31/23 100,000 114,236 14,236 966,200
(Discount Situation) Assume the following data.
12/31/24 100,000 115,944 15,944 982,144
Face value of bonds - P1,000,000; Stated rate of interest - 10%; Effective 12/31/25 100,000 117,856 17,856 1,000,000
(market] rate of interest -12%; Term - 5 years; Date of purchase - January 1,
2021, Interest is payable eyery December 31 and the company uses the Interest Revenue
calendar year that ends on December 31.
> The interest revenue earned on debt investments at amortized cost is
Present value of 1 at 12% for 5 periods - 0.567427. represented by the effective interest (Carrying amount x effective rate].
Present value of an ordinary annuity of 1 at 12% for 5 periods - 3.604776.
Disposal/Derecognitidn
The bonds price is computed as follows: ^
> Gain or loss is recognized for the difference between the sales price and the
' Discounted value of maturity value carrying amount of the debt investment on the date of sale. Amortization
Pl,0dp,000x 0.567427 P567,427 ' should be recorded until the date of sale to update the carr3dng amount of
Discounted value of interest payments the investment sold. . •
Pi,000,000 x 10% X 3.604776 360.479
Total'- - " ■ ' '"j" ■ • . ■ . ^ P927.905 > When the sale takes place between interest. dates, accrued interest is
recorded as Interest Revenue and added to the sales price to'determine the
Alternative computation: total proceeds from the sale. '

Premium or Discount
Face yalue of bonds;x difference in periodic interest rate x PVAF
P1>000,000 x.2% X 3^60477:6 = 72,09^ (discount, since stated interest
rate is lesseir than market interest rate]

128 129
Chapters Chapter6
DebtInvestments DebtInvestment^

DEBTINVESTMENTS AT FAIR VALUE THROUGH PROFIT OR LOSS(FVPL) Disposal/Derecognition

Initial Recognition > Gain or loss is recognized for the difference between the sales price and the
most recent measurement at the reporting date.
,> Similar to equi^investments,debtinvestments at fair value through profit
or loss are initially recorded at cost(purchase price which is generally its > When the sale takes place between interest dates, accrued interest is
fair market value at the date of acquisition). Any transaction cost directly recorded as Interest Revenue and added to the sales price to determine the
attributable to its acquisition does not form part of the cost of investment total proceeds from the sale.
and is recorded as an expense.
Using the data of A Corporation,the sale on January 31,2022 is recorded as
On January 1,2021,A Corporation purchased P1,000,000,12%,5-
year bonds of Company.B at 101 plus broker's commission of P2,000. Cash (1,025,000 +10,000} 1,035,000
DebtInvestmentatFVPL 1,022,000
Interestonthebondsispayableannually every December 31. Market value Interest Revenue.(IMx 12% x 1/12) 10,000
ofthe bonds on December 31,2021 is Pl,022,000. The investment was sold
for Pl,025,000 on January 31,2022. Gain on Sale ofDebtInvestment 3,000

The entity intends to speculate on fluctuations ofinterest rate and DEBT INVESTMENTS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE

en^r^^ d®bt investments at fair value through profit or loss. The INCOME(FVOCI)

Initial Recognition
DebtInvestments atFair Value throagh P&L 1,010,000;
Broker's Commission 2000^ > Debt investments designated as at fair value through other comprehensive
1,012,000 income are initially recognized at purchase price plus transaction costs
directly attributable to its acquisition.
Interest Revenue
Interest Revenue
receivahip^^f^^^'*"V^ represented by the amount of interest received or
date fnffr * nominal/stated rate of interest). Based on the > The interest revenue earned on debt investments at amortized cost is
represented by the effective interest(Carrying amount x effective rate)
mlllio® X12%)riSL°°' PIOO.OOO (PI
Cash Measurement After Initial Recognition
120,000
InterestRevenue
120,000 > At each interest date and at reporting dates, any premium or discount is
amortized using thie effective interest method.
^ ue ftTurfTnroTo'^^
vaiue as debtsecurities atfair
tnrough profit or loss isnotsubject to amortization. > Atthe reporting date,the debt investments are measured at fair value. The
difference between the amortized cost and the fair value ofdebtinvestment
MeasurementAfter Initial RecognWpn is taken to equity under other comprehensive income.

^ measured at fair vaiue and Assume the following data for Bond Corporation:
r^Sr A C~tio^r
value on December 31,2021 is
'» ^Iven
investment to fair Face value of bonds - P1,000,000; Stated rate of interest - 12%;
' Effective(market)rate of interest - 10%; Term - 5 years; Date of purchase -
January 1,2021. Interest is payable every December 31 and the company uses
DebtInvestments atFVPL ipnnn the calendar year that ends on December 31.
""realized Caln/Lo^on DebtInvestments-P&L 12.000-
Assume further that quotations for the bond on December 31,2021 and
December 31,2022 are 105 and 104,respectively.
entitles profitoHoslo^^^^^^ reported in the

130 131
Chapter6 . Chapter6
DebtInvestments DebtInvestments

The journal entries for the first; two years relating to the debt \ ' 2022 2021
investments are as follows:(Figures/table can be taken from the illustration of At amortized cost Pl,049,736 Pl,063,396
debt investments at amortized cost- premium situation) Cumulative balance ofFV adjustment 9.736 ri3.396}
Fair value PI.040.000 P1.0.q0.000
January 1,2021
Statement ofComprehensive Income 2022 2021
DebtInvestmentatFVOCl 1,075,815 Other comprehensiv&income:
Cash 1,075,815 Unrealized Gain/Loss on Debt
Investments at FVOCI' 3,660 (13.396)
December 31/2021
Disposal/Derecognition
Cash 120,000
InterestRevenue 10Z581
> The debt fhvestment account) togetiier with the fair value adjustment
DebtInvestmentatFVOCI 12,419
account, are derecognized upon disposal.'The cumulative balance of the
JJnrealiz^d Gain/Loss on DebtInvestment-FVOCI 13,396 unrealized gain/loss account is transferred to profit or loss.
Fair Value Adjustment - DebtInvestments at
> When the sale takes place between interest dates, accrued interest is
' (FVOCI)' ' 13,396 recorded a^ Interest Revenue. \ . . v .
Fair value(IMx 1.05) 1,050,000
Amortized cost(see table) 1.063.396 Assume that the debt investment in the'lllus^ation is sold on
Adjustment(Unrealized Loss) 13.396 January 1,2023,at its market value (104). The journal entry to record the
'sale is: ,' i.
December 31,2022
Cash . ) 1,040,000
Cash 120,000 Fair Value Adjustment - Debt Investihent^ at '' '
Interest Revenue 106,340 FVOCI J 9,736
DebtInvestmentatFVOCI 13,660 Loss on Sale ofDebtInvestments 9,736
DebtInvestments at FVOCI 1,049,736
Fair Value Adjustment-DebtInvestmentatFVOCI 3,660 Unrealizedfiain/Loss on DebtInvestment
Unrealized Gain/Loss on Debt Investment at atFVOCI ^ 9,736
FVOCI 3,660
Fair value(IMx 1.04) 1,040,000
Amortized cost(see table) 1.049.736 Reclassification of Debt Iiivestm'ents
Cumulative unrealized loss 9,736
Equity balance before adj. • 13.396 > Reclassification shall be,made when and only when an entity changes its
Unrealized gain . 3.660 business model for managing its financial assets. •
> Reclassification is prohibited (1) when there is change in .management
• The following amounts will appear in the financial statements for 2021
and 2022.
intention;(2) lipon temporary disappearance ofa particular market; and
(3)when transfers of assets are niade between existing mbdds.
Statement ofFinancial Position 2022 2021
> Reclassification shall be made prospectively from the date of
Assets section:
reclassification.
DebtInvestment atFVOCI Pl,040,000 Pl,050,000
Equity section: > In a reclassification to FVPL,
Cumulative Unrealized
Gain/Loss on DebtInvestment at • From amortized cost, the new debt investment(FVPL) is recorded at
FVOCI (9,376) ^ (13,396) fair value and the difference between fair Value and amortized cost is
taken to profit or loss.
These amounts shown as assets are inclusive of the fair value
adjustment thatis added,ifdebit balance or deducted,ifcredit balance,
as follows:

132 133
 m
Cliaiiter6
DebtInvestments M Chapter 6
Debt rnvestments

• From FVOCI,the new debt investment(FVPL)is recorded at fair value TRUE OR FALSE QUESTIONS
'and the cumulative unrealized gain/loss in OCl is transferred to profit . - $ • . t

or loss.
■
1. A debt instrument at FVPL is initially recorded at purchase price plus
transaction costs.
> In a reclassification to FVOCI, ''MM

• From amortized cost,the new debt investment(FVOCI) is recorded at m 2.
■Mr
fair value and the difference between fair value and amortized cost is
taken to other comprehensive income. The effective interest rate used
as debt investment at amortized cost remains the same. 3.
' I/■ ■■■.
I,
Reclassificatioh of debt investments is only allowed when an entity changes its
business niodel for managing its financial assets.
Debt securities include corporate bonds and convertible debt, but not
government securities.
1

• From FVPL,the new debt investment(FVOCI)is recorded at fair value liv

and an effective interest rate is calculated based on the fair value on the
i'/'l
4. A debt instrument shall be measured subsequently at amortized cost when the
date ofreclassification. OS; business model is to collect contractual cash flows that are solely payments of
m principal and interest
> In a reclassification to amortized cost, iim
5. Reclassification shall be made prospectively from the date of reclassification.
• From FVPL,the new debt investment(at amortized cost)is recorded at if
fair value,that serves as the initial cost and an effective interest rate is ,'/S 6. If a company transfers debt instruments at amortized cost securities to FVOCI
calculated based on the fair value on the date ofreclassification. classification, the unrealized gain or loss is recognized in income.

• From FVOCI, the accumulated unrealized gain/loss and fair value

i •7. Unrealized fair value gains and losses are recognized in net income for debt
adjustment balance (amounts are the same), are eliminated in the securities at FVOCI.
accounts. The new debt investment(at amortized cost) is recorded at
the amount ofthe FVOCI,and the same effective interest rate is used,as 8. Debt investments not held for collection are reported at net realizable value.
if it had been designated at amortized cost from the date of initial :ll
recognition. 9. Debt investment at FVPL is assessed for impairment at each reporting period.

Impairment ofDebtInvestments Measured at Amortized Cost ■Of 10. The present value of 1 arid present value of an ordinary annuity of 1 are used to
I 'i';) compute the price to pay for a bond.
j iv' i'i'
^ When there is objective evidence of impairment, the amortized cost is
adjusted to its impaired valuje and the loss is taken to profit or loss, after 11. A change in intention related to a particular flnancial asset depicts a change in
which a new effective interest rate is used for subsequent amortization. business model.

> This impairment is recorded either by crediting directly the investment
account or through the use ofan allowance account.
The impairment loss is measured as the difference between the cariying
amount ofthe debt investment(including accrued interest, if any) and the
present value of estimated future cash flows discounted at the financial
asset's original effective rate at initial recognition.
12. Trading securities are securities bought and held primarily for sale in the near
term to generate income on short-term price differences.
13. The interest income for the year would be higher than the nominal interest if
the bond was purchased at a premium.
14. ^ A bond investment that satisfles the amortized cost measurement may be
designated irrevocably at fair value through profit or loss.

15. Companies do not report changes in the fair value of debt securities at FVOCI as
part of profit or loss until the security is sold.

16. Coupon bonds are bonds that can be freely transferred and have a detachable
coupon for each interest payment

134
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 ■■m

Chapter6 Chapter 6
DebtInvestments "M Debt Investments

17. The reversal of impairment loss for debt investment measured at amortized FINANCIAL ACCOUNTING THEORY QUESTIONS
costshall not resultin a carrying amountofthe financial asset that exceeds what (
the amortized cost would have been had the impairment loss not been Debt investments at amortized cost are reported after initial'recognition at
recognized at the date the impairment is reversed. a. acquisition cost
M b. fair value.
18. Zero-coupon bonds do not pay periodic interest; however, interest income is M c. amortized cost using straight-line method.
still recognized by the investor. M d. amortized cost using effective interest method.
0'
19. The Unrealized Fair Value Adjustment account has a normal credit balance. Under PFRS 9, the classification of debt investments shall be made on the basis,
9
I v.'',':;. of '
20. In.IFRS 9,the tainting rule prescribes a two-year time-out period during which the business model for managing the financial asset
an entity is not allowed to classify any hnancial assets as amortized cost if the contractual cash flow characteristics of the financial asset
entity Has sold,transferred,or reclassified more than an insignificant amount of management's intention of holding the debt ihstruments.
these investments before maturity during the current financial year, or during both the business model for managing the financial asset and the
the two preceding financial years. contractual cash flow characteristics of the financial asset
■fff:
21. Transaction costs incurred in the acquisition of bonds to be measured at 1/0 An investor purchased debt investments at amortized cost on January 1.
amortized costare included as part ofthe cost ofthe investment. ^nual interest was received on December 31. The investor's, interest income
for the year would be lower than the annual interest received if the debt
22. An impairmentloss is the excess ofthe carrying amount ofthe debt investment instrument was purchased at
over present value ofthe expected cash flows. a. a discount :
b. a premium.
23. When transaction costs are incurred, it may result to the adjustment in the c. par.
effective interest rate. d. face value.

24. The Unrealized .Holding Gain/Loss—FVOCI account is reported as a part of A debt investment at fair value through profit or loss is reclassified to debt
o,ther comprehensive income. investment at amortized cost What amount is used at the transfer date to
record the security in the amortized cost classification?
25. The interest income for debt securities is always computed at bond carrying a. At amortized cost at date of reclassification
amount multiplied by the original effective interest rate. b. At fair value at date of reclassification and difference between carrying
.. .. . • ; amount and fair yalue is taken to;profit or loss. '
26. A reclassification adjustment is necessary when a company reports realized c. At fair value at date of reclassification and difference between carrying
gains/losses as part of net income but also shows unrealized gains/losses as amount and fair value is taken to other comprehensive income
part of other comprehensive income. d. At fair value at datfe of reclassificatiori

27. When bonds are acquired ata discount,the effective interest rate is greater than Interest revenue for debt investments at fair value through profit or loss is
the nominal rate. computed based on the instruments',
a. carrying amount using the effective interest rate. .
28. Accrued interest on bonds that are purchased between interest dates decreases b. cmrylng amount using the nominal interest rate.
the amount the seller receives. c. face value usirig the effective interest rate.
d.' face value using the nominM interest ratei
29. Callable bonds are bonds containing call provisions giving the issuer thereofthe
right to redeem the bonds,prior to their maturity date. Interest revenue for debt investments at amortized cost is cpmputed based on
the instruments'
30. Companies report trading securities at fair value, with unrealized holding gains a. carrying amount using the effective interest rate.
and losses reported in net income.. b. carrying amount using the nominal interest rate.
c. face value using the effective interest.rate.
d. face value using the riominal interest rate.

136 137

■■Ml
 Chapter6
?5Yestments Chapter6
Debt Investments
7.
there is an objective evidence ofimpairment in value ofdebtinvestment
enured at amortized cost, the carrying amount of the asset shall be reduced 13. The interest income reported for a debt investment at amortized cost initially
eifter directly or through the use of an allowance and the amount of the loss acquired at a premium is equal to
snail be a. the effective interest rate multiplied by the face amount of the bond
^ ignored. investment
b. recognized in equity. b. the stated interest rate multiplied by the face amount of the bond
c. recognized in profit or loss. investment
d. deferred until the date ofderecognition. c. the effective interest rate multiplied by the carrying amount of the bond
investment at the beginning ofthe year
8.
If in subsequent period, there is objective evidence of recovery in impairment d. the stated interest rate multiplied by the carrying amount of the bond
previously recognized for debt investments measured at amortized cost, the investment at the beginning ofthe year
nmount ofthe reversal
3- shall not be recognized. 14. Bonds with a par value of P5.0 million carrying a stated interest rate of 12%
b. shall be recognized in profit or loss. payable semi-annually on March 1 and September 1 were purchased on August
c. shall be recognized in equity. 1. The total payments made for the purchase amounted to P5,200,000. The
d- shall be recognized when the asset is derecognized. best explanation for the excess amount paid over par value is that
a. the bonds were purchased at a premium.
9.
No a^rtization of,premium or discount is required for this class of debt b. the bonds were purchased at a discount plus accrued interest
investment ^ c. the bonds were purchased at par value plus accrued interest
a. At amortized cost and at fair value through profit or loss d. no explanation is possible without knowing the maturity date of the bond
b. At amortized cost issue. ' '

c- At fair value through profit or loss

d. Neither at amortized cost nor at fair value through profit or loss 15. For an investment in debt securities portfolio at amortized cost which of the
following amounts should be included in the period's profit or loss?
- 10. How is the premium or discounton debtinvestments atfair value through profit
or loss accounted for? ® I. Gains and losses during th^ period as a result ofchange in fair value.
part ofamortized cost and amortized over the life ofthe bonds. II. Amortization of discount or premium
0. As part ofthe cost until the disposal ofthe asset III. Interest received and accrued
c. ^expense or revenue in the period the bonds are purchased.
d. a. I and II
All ofthe above.
b. 111
11. All ofthe following are characteristics ofdebt securities, except c. II and III
a. They have a maturity value. d. I and III

^c. have aanmaturity

They have interestdate.
rate that specifies the periodic interest payment 16. Which of the following is correct about the effective-interest method of
d. They have a conversion privilege. amortization?
a. The effective interest method applied to investments in debt securities is
12. The use of the effective interest method in amortizing bond premium and different from that applied to bonds pa3^ble.
discount results in b. Amortization ofa discount decreases from period to period.
a. a varying amount being recorded as interest income from period to period, c. Amortization ofa premium decreases from period to period.
b. uniform/constant amount ofinterest income from period to period, d. The effective-interest method produces a constant rate of return on the
Ci varying rate of interest being recorded as interest income from period to carrying amount ofthe investment from period to period.
period.
d. amount of interest income similar to the interest received from period to 17. Securities which could be classified as amortized cost are
period. \ a. preferred stock.
b. warrants.
c. municipal bonds.
d. treasury stock.

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 Chapter 6 Chapter 6
DebtInvestments Debt Investments

18. When an investor's accounting period ends on a date that does not coincide with 24. Which of the following financial assets are assessed for impairment?
an interest receipt date for bonds held as an investment,the investor must a. Equity investments at FVPL
a. make an adjusting entiy to debit Interest Receivable and to credit Interest b. Equity investments at FVOCI
Revenue for the amount of interest accrued since the last interest receipt c. Debt investments at FVPL
date. d. Debt investments at amortized cost and debt investments at FVOCI.
b. notify the issuer and request that a special payment be made for the
appropriate portion of the interest period. 25. Impairments of debt investments at amortized cost are
c. make an adjusting entry to debit Interest Receivable and to credit Interest a. recognized as component of OCl.
Revenue for the total amount of interest to be received at the next interest b. based on fair value for nontrading investments.
receipt date. c. based on discounted contractual cash flows.
d. do nothing special and ignore the fact that the accounting period does not d. evaluated at each reporting date.
coincide with the bond's interest period.

19. Which ofthe following is not correct in regard to trading securities?

a. They are held vvith the intention ofselling them in a short period of time.
^ Anv durof.
c. Any .or premium
discount ® is not amortized. °f net income.
d. All ofthese are correct.

20. An investor purchased ten-year,10o/„ bonds that pay interest semiannually.The V ■ ' i*J 'd -.■i
bonds are sold to yield 8%.One step in calculating the issue price of the bonds
IS to multiply the principal by the table value for
a. 10 periods and 10% from the present value of 1 table.
b. 10 periods and 8% from the present value of 1 table. ■
c. 20 periods and 5% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
1':. :

, " .* I\ ..ul'hV '■ i

Which ofthe following is not generally correct about recording a sale ofa debt
P 21.

security before maturity date?

a. Accrued interest will be received by the seller even though it is not an
interest pajmient date.
b. An entry must be made to amortize a discount to the date of sale
■ \

r s'
c. The entry to amortize a premium to the date ofsale includes a credit to the ■■ ' '•*"
Premium on Investments in Debt Securities. ..iN- •: ' i.
d. A gain or loss on the sale is not extraordinary. /

.'-v: .'r', ..y .i- ^ :.-f. r.. -i'-) '-s

22. Companies that attempt to exploit inefficiencies in various derivative markets
by attempting to lock in profits by simultaneously entering into transactions in
two or more markets are called VTv S. ' V
a. arbitrageurs.
b. gamblers. ' y
c. hedgers.
;v:.( • : .r- ••
d. speculators.
• ' •' .''i' ' \ \ • •" = V r'vv* . ' ■
"'•r' .', 0. -4 i-.-'i
Which of the following is generally not a purpose for acquiring investments? ■r .
23.
a. As a main source of income
X' if. • • ». .. .

f' . :
b. To establish long-term relationship with suppliers and customers I
■ c
c. To acquire control or significant influence over another entity .'A ...\

d. To accumulate funds for future use.

140 141
 . U .M ■ •

Chapter 6
Chapter 6 DebtInvestments
Debt Investments
(4) How much was the total cash payment in the acquisition of the debt
PRACTICAL FINANCIAL ACCOUNTING >x *
investments on October 1,2021?
a. P101,833.33
On January 1, 2021, F Company purchased 5-year bonds with face value of b. P101,333.33
P8,000,000 and stated interest of 10% per year payable semi-annually January 1 c. P99.500.00
and July 1. The bonds were acquired to yield 8%. Present value factors are: d. P99.000.00

PV of an annuity of 1 for 5 periods at8% - 3.993 (5) What is the amount of interest revenue reported by Ghregny on this bond
PV of 1 for 5 periods at8% - 0.681 investment in the 2021 statement ofcomprehensive income?
PV of an annuity of 1 for 10 periods at 4% - 8.111 a. PO
PV of 1 for 10 periods at 4% - 0.676 b. P3,465
c. P3,483
(IJ Whatis the purchase price ofthe bonds? d. P3,500
a. P8.000,000
b. P8,642,400
c. P8,652,400 On January 1, 2021, Meigmax Company purchased Mixzen Corporation,
d. P8.662,400 P1,000,000,12% bonds for Pl,065,000,a price that yields 10%. The bonds pay
interest semi-annually every January 1 and July 1 and they mature on January 1,
(2) Assuming that the bonds pay interest annually every December 31 [instead of 2025. At December 31, 2021,each PI,000 bond is selling at PI,055.
semi-annually), all other data being the same, how much is the bond price?
a. P8,000,000 (6) Assuming that the securities are classified as debt investments at amortized
b. P8,642,400 cost, whatis the carrying amount ofthe debtinvestmentreported on December
c. P8,652,400 31,2021 statement offinancial position?
d. P8,662,400 a. PI,065,000
b. Pl,058,250
c. Pl,055,000
On January 1, 2021, Scruffy Company purchased eight-year bonds with a face d. Pl,051,,163
value of P2 000,000 and a stated interest rate of 12%, payable semi-annually on
June 30 and December 31. The debt investments were purchased to yield 14%. (7) Assuming that the securities are classified as debt investments at amortized
Present value(PV]factors are: cost, what is the interest revenuefrom the bond investmentfor the year 2021?
a. P106,500
12% 14% 6% 7%
PV of 1 for 8 periods b. P106,163
0.4039 0.3506 0.6274 0.5820 c. . P120,000
PV of 1 for 16 periods 0.1631 0.1229 0.3936 0.3387 d. P127,800
PV of annuity of 1 for 8 periods 4.9676 4.6389 6.2098 5.9713
PV of annuity of 1 for 16 periods 6.9740 -6.2651 0.1059 9.4466 (8) Assuming that the securities are classified as debt investments atfair value
through profit or loss, what is the carrying amount of the debt investment
r""W pricefor the debtinvestment? reported on December 31,2021 statement offinancial position?
b. Pl,810,992 a. Pl,065,000
c. PI,814,536 b. Pl,055,000
d. P2,000,000 c. Pl,051.163
d. P1,000,000

On October 1, 2021, Ghregny Company purchased as debt investments at fair (9) Assuming that the securities are classified as debt investments atfair value
value through profit or loss. PIOO.OOO, 14% bonds of Hampyn Company for 99 through profit or loss, what is the interest revenuefrom the bond investment
plus accrued interest and broker's fees. Interest is paid semi-annually on for the year 2021?
a. P120,000
PSOo"^'^ "gust . roker s fees incident to this purchase amounted to b. P106,500
c. P106,163
d. P100,000

jV. .V
 Chapter6 Chapter6
Debt Investments Debt Investments

On January 1, 2021, Sprigmawn Company purchased Broangy Corporation,9% G. On January 1, 2021, Grow Company purchased P1,000,000,12% bonds of Glow
bonds with a face value of P4,000,000 for P3,756,000. The debt investments are Company for Pl,063,394, a price that yields.10%. Interest on these bonds Is
carried at amortized cost The effective interest rate at that time is 10%. The payable every December 31.The bonds mature on December 31,2024. Qn April
bonds are dated January 1, 2021 and mature on December 31,2030. The bonds 1,2023,to pay a maturing obligation. Grow sold P600,000 face value bonds at 101
pay interest annually on December 31. Market quotation for die debt securities plus accrued interest
at December 31,2021 is 99.
Market value of the bonds on different dates is as follows:
(10) Whatis the interest revenuefor theyear2021?
a. P400,000 December 31,2021 108
b. P377,160 ' December 31,2022 106
c. P375,600 December 31,2023 104

d. P360,000
Assume that the debt investment is intended to speculate on fluctuations of
interest orfair value and is heldfor trading.
(11) What is the carrying amount of the debt investment at amortized cost at
December31,2021? (15) How miich is the interestincomefor the year ended December31,2021?
a. P4,000i000 , ' a. P12Z607
b. P3,756,000
b. P120,000
c. P3,7m,760
c. P106,399
d. P3,771,600 d. P100,000 ■'
(12)Assuming diatthe debtinvestmeritis designated as atfair value through other (16) What amount of gain or loss should Grow report on the sale of the bond
comprehensive income. How much is the unrealized gain (loss) reported in r: ii; investment on April 1,2023?
other comprehensive incomefor theyear2021? a. P30,000gain
a. P188,400 b. P30,000loss
b. P171,240 c. P12,344gain
c. P204,000 d. P12,344 loss
d. P 40,000
(17) At whatamountshould the bond investments be shown on December31,2022
F. Ecstasy Company purchased P8,000,000, 11%,5-year bonds on April 1, 2021, and December 31,2023statement offinancial position?
when the market interest was 10%. The financial instruments meet the business a. Pl,000,000andp400,000 '
model test and are classified as debt investments at amortized cost The bonds b. Pt,034,706 and Pl,018;177
are purchased at P8,295,000 and pay interest annually on March 31. Ecstasy c. Pl,000,000andP416,000
Company uses the effective interest method of amortization and its accounting d. Pl,060,000 and P416,000
year ends on December 31. i ^
. ' ■ ■ • . ' ■■ • ' Assume that the company intended to collect the principal and interest
(13)At how much were the debt investments reported in the December 31, 2021 over the term ofthe bonds'and designated the investment at amortized
and December31,2022^tatementoffinancial position? cost(An amortization table is presented belowfor convenience)
a. P8,244,500 and P8,188,950
b. P8,295,000andP8244,500 Interest Interest Effective Carrving
c. P8,257,125andP8,202,837 Date Due Interest Premium Amount
f •

d. P8,257,125dndP8,188,950 01/01/21 1,063,394

12/31/21 120,000 106,339 13,661 1,049,733
(14) Hoyv much is the interest revenue reported in Ecstasy Company's statement of 12/31/22 . 120,000 104,973 15,027 1,034,706
comprehensive incomefor the year-ended December 31, 2021 and December 12/31/23 120,000 103,471 16,529 1,018,177
31,2022? . 12/31/24 120,000 101,823* 18,177 1,000,000
a. P829,500 and P824,450 *Adjusted due to rounding off.
b. P622,125 and P825,713
c. P880,00p and P880,000
d. P622,125andP824,450

144 145
Chapter6 Chapter.6
DebtInvestments DebtInvestments

(18)At what amountshould the debt investments be shown in December 31,2022 (24) How much is the unrealized gain/loss taken to other comprehensive income
statement offinancial position? for theyear2022?
a. P1,000,000 a. P4,973 Loss
b. Pl,063,394 b. P4,973Gain
c. Pl,034,706 c. P25,294 Gain
d. Pl,049,733 d. P25,294 Loss

(19) Whatamountofgain or lossshould Grow recognize on the sale ofinvestments H. On July 1,-2021, Clincox Company purchased as debt investments at amortized
on April 1,2023? cost, Enreign Coloration's 10-year,8% bonds with a face amount ofP1,000,000
a. P12,344gain for P840,000. the bonds pay interest semi-annually on June 30 and December
b. P12,344loss 31. Clincox recorded bond discount amortization of P3,600 for the six months
c. P30,000gain ended December 31,2021.
d. P30,000loss
(25) How much is the interest revenue ofClincoxfrom this investment in 2021?
(20) What amount ofinterest income will be taken to profit or lossfor the year a. P33,600
b. P36,400
ended December31,2023?
a. P120,000 C. P40,000
b. P103,471 d. P43,600
c. P61,868
d. P56,909 I. On January 1, 2021, Braugman Company purchased as debt investments at
amortized cost,P2,000,00b ofEpvaign Company's8% bonds for Pl,812,000. The
(21)At whatamountshould the bond investment be shown on December 31,2023^ bonds were purchased to yield 10% interest. The bonds mature on January 1,
statement offinancial position? 2031 and pay interest semi-annually on January 1 and July 1. Braugman uses the
a. P400,000 effective interest method of amortization.
b. P407,271
c. P416,000 (26) In its December 31, 2021 statement ofcomprehensive income, what amount
d. P600,000 should Braugman report as interest revenue?
■ > ' a. P200,000
i455iiine that at initial recognition, the investment is held in the business b. P1S1,730
model of collecting contractual cash flows and selling the financial assets; c. P181,200
hence recognized as debt investment at fair value through other d. P160,000
comprehensive income.

(22)At what amountshould the debt investment be reported in the December 31, J. On January 1, 2020, Bretzign Company purchased as debt investments at
2022statement offinancial position? amortized cost, P1,000,000 face value of Bautzen,Inc.'s.8% bonds for P912,400.'
a. Pl,060,000 The bonds were purchased to yield 10%. The bonds mature on January 1,2026
b. P1,P00,000
and pay interest annually on January 1. Bretzign uses the interest method of
c. Pl,034,706 amortization. , •
d. Pl,049,733
(27) What amount (rounded to nearest PlOO) should Bretzign report as debt
investments at amortized cost on December 31, 2021 statement offinancial
(23) How much is the unrealized gain/loss taken to other comprehensive income position?
for theyear2021?
a. P912,400
a. P30,267Loss
b. P923,600
b. P30,267 Gain
c. P932,400
c. P80,000Loss
d. P936,000
d. P80,000Gain

146 147

'li
.Jm.
 Chapter6 Chapter6
Debt Investments
DebtInvestments

(28) Whatis the interest revenue reported by Bretzignfrom this investmentfor the On June 30, 2021, one-half of the bonds were sold for Pl,595,000 pliis accrued
year ended December31,2021? interest After the disposal, the company changed its business model for
a. P80,000
managing its financial assets and is now actively trading its portfolio.- At
b. P91,240
December 31,2021,the bonds were quoted at 101.
c. P91,521 (33) Whatis thegain on the sale ofthe bond investment?
d. P92,360 a. P9S,000
b. P54,291
K. On July 1/ 2020, Sprakenheit Company purchased as debt investments at fair c. P49,250
value dirough profitor loss,P500,000 face value Swazzeg,8% bonds for P455,000 d. P41,000
plus accrued interest The bonds mature on Januaiy 1, 2025 and pay interest
annually on January 1. On December 31,2020,the bonds have a market value of (34) What is the carrying value of the remaining bond investment reported in
P472,500. On Februaiy 14,2021,Sprakenheit sold the bonds for P460,000. Vivacompenhagen's December 31,2021 statementoffinancial position?
a. Pl,556,250
(29) On its December31,2020statementoffinancialposition, wfiat amountshould b. PI,541,250 ' '
Sprakenheit report as debtinvestments atfair value through profit or loss? c. Pl,526,250
a. P4S5,000 d. Pl,515,000
b. P457,750
c. P460,000
d. P472,500
N. On June 1, 2021, Schrouck Company purchased debt investments at amortized
cost,8,000 ofPl,000 face value,8% bonds ofSpark Company for P7,383,000. The
(30) Whatis the interest revenue-reported by Sprakenheitfor the year2020? ' bonds were purchased to yield 10% interest Interest is payable semi-annually
a. P15,000
on December 1 and June 1. The bonds mature on June 1,2026. Schrouck uses
b. P18,000
the effective interest method ofamortization. ^ On June 1,2022,Schrouck sold the
c. , P20,000
bonds for P7,850,000. This amount includes the appropriate accrued interest
d. P22,750
(35) Whatis the gain or loss on the sale ofthe debtinvestment?
a. P368,700 - '
(31) Whatis thegain or loss on the sale ofthe debtinvestmentin 2021?
b. P366j240
a. P5,000gain
b. P12,500loss
c. P48,700 ' '
d. P46,240 r
c. P40,000gain
d. PO f ' i '
t ,
(36) IfSchrouck's accounting year is the calendar year(ending on December 31),
how much is the interest revenuefor tiieyear ended December31,2021?
L. purchased debt investments at amortized cost at a discount a. P320,000 '
ofP20,0Q0. Subsequently, Pragheuir sold these bonds at a premium of P28,000. b. P369,150 '
During the period^that Pragheux hd this investment, amortization of discount c. P371,608
amounted to P4,000. d. P431,085 ' . —

(32) What amount should Pragheux report as gain on the sale of the debt
investment? 3. On July 1,2021,Lay Company,purchased term bonds of BeefCompany for a total
a. P24,000 amount of P3,050,000 which included direct transaction costs of Pi00,000 and
b. P44,000 appropriate accrued interest
c. P48,000
d. P52,000
The face value of the bonds was P3,000,000 and the coupon rate is 10%. The
bonds will mature on December 31,2025 and pay interest annually on December
31. Because of market opportunities. Beef bonds were classified as debt
M. On January 1, 2020, Vivacompenhagen Company purchased bonds with a face investments at fair value through profit or loss by Lay Company. The bonds are
value of P3,000,000 for P3,108,000 to yield 12%. The'bonds are due "on quoted at 105 on December 31,2021.
December 31,2024 and carry a 13% interest rate. Interest is receivable annually
on December 31.

149
148
Chapter6 Chapter6
DebtInvestments Debt Investments

(37) What is the unrealized gain to be recognized in Lay Company's profit or loss (41) Whatis the amountat which the debt investments atfair value through profit
for theyear2021? or loss shall be recorded upon reciassification on December31,2021?
a. PSO.OOO a. at market value ofP3,030,000 and the difference between market value
b. P200,000 and amortized cost is taken to equity
c. P250,000 b. at market value ofP3,030,000 and the difference between market value
d. PSSO.OpO and amortized cost is token to profit or loss
c. at amortized cost
P. On December 31,2020,Smith Company purchased debtinvestments at amortized d. atface value
cost,P3,000,000 serial bonds with a nominal rate of10% and effective rate atthat
time is 13%. Bonds with a face value of P1,000,00,0 mature on December 31, (42) Whatis the amount taken to profit or loss as a result ofthe reciassification?
2021 and every December 31 thereafter. Present value factors at 13% are as a. P129,721
follows: 1 period - 0.885; 2 periods - 0.783; 3 periods - 0.693. b. P210,900
c. P 30,000
(38) Whatis the initial cost ofthe debtinvestment? d. P 99,721
a. P2,586,000 * " ' ^ ■
b. P2,852A00
R. Power Company purchased the following securities during 2021:
c. P3,000;000
d. P3,00t900 Feb.1 Blossom ordinary shares, 2,000 shares for P374,000. The shares
represent 2% ofthe total outstanding shares of Blossom.
(39) Whatis the carrying amountofthe debt investment on December 31,2021? April 1 10% treasury bonds due April 1, 2031; interest is payable April 1 and
a. Pl,923,212 October 1; lOO bfP10,000 face value bonds purchased @ 100.
b. P2,852,400 July 1 Buttercup 12% bonds, P150,000, face value dated March 1, 2021;
c. P2,923,212 purchased at face value plus accrued interest Interest is payable
d. P3,000,000 annually on March 1. The bonds are due on March 1,2031.

The fair values at December 31,2021 are as follows:

Q. On Januaiy 1, 2020, Well Company purchased 3,000, P1,000 face value term
bonds with a stated rate of 10% as at amortized cost. The bonds pay interest Blossom ordinary shares 190
annually on December 31 and will be redeemed entirely by the issuer on 10% treasury bonds 99
December 31, 2023. The bond investment was purchased for P2,819,100 at an Buttercup 12% bonds 102
effective rate of12%.
All of these securities are classified as debt investments at fair value through
On December 31, 2021, the entity changed business model for managing its profit or loss.
financial assets and this investment was reclassified as debt investments at fair
value through profit or loss. On this date,the bonds are quoted at 101. (43) How much total income shall Power reportfor the year 2021 as a result ofits
holdings in the above securities?
(40) Whatis the carrying value ofthe debtinvestment on December 31,2021 prior a. P(1,000)
to reciassification? , b. P83,000
a. P3,030,000 c. P84,000
b. P3,000,000 d. P89,000
c. P2,900,279
d. P2,857,392
S. On. January 1, 2020, Desiree Company purchased bonds with face value of
P5,000,000 designated as at amortized cost The company paid P4,742,000. The
bonds mature on December 31,2022 and pay6% interest annually on December
31 of each year with 8% effective 5neld. The bonds are quoted at 105 on
December 31,2020. The bonds are sold at 110 on December 31,2021.

150
151
Chapter6
DebtInvestments.

(44) What amount ofgain on sale on these bonds should be reported in the 2021
statementofcomprehensive income? Equity Investments
a. P758,000
b. P59Z931
c. P500,000 Learning Outcomes
d. P250,000 -
After reading this chapter, you should be able to:
T. Palazzo Company purchased P4,000,000 of 10% bonds of Sapphire Company on
Januaiy 1,2021, paying P3,761,000. The bonds mature Januaiy 1, 2029; interest (a) define investments in equity securities;'
is payable each July 1 and Januaiy 1. The discount of P239,000 provides an (c) measure equity investments at the date ofinitid recognition;
effective jdeld of 11%. Palazzo Company uses the effective-interest method and (d) account for transactions affecting equity investments subsequent to
acquisition;
appropriately carries this debt investment at amortized cost.
(ej measure equity investments at the end ofthe reporting period; and
(45) For the year ended December 31, 2021, Palazzo Company should report (f^ obtain proficiency and accuracy in answering theoretical questions and solving
»interestrevenuefrom the Sapphire bonds of problems relating to investments in equity securities.
a. P376,000.
b. P411,087. Equity Investments
c. P414,087.
d. P400,000. > Investments in ownership shares and potential ownership shares.
^ * . ■ "

> These investments are classifie.d based on the intention ofthe holding entity and
the level of influence acquired by the investor over the operating and financial
policies ofthe investee,as follows:

• Equity investments at fair value through profit or loss (FVPL). This is the
classification when the equity securities are held for trading and there is
neither control nor significant influence in the operating and financial
policies of the investee company.
• Equity investments at fair value through other comprehensive income
(FVOCIJ. When there is neither control nor significant influence and the
equity securities are non-trading, • the investor, at the date of initial
recognition, makes an irrevocable choice of designating the securities
either jas FVPL or FVOCl.

• Investments in associates. ,The investor classifies the equity investments

as investments in associates when it has the ability to participate in the
operating and financial policy decisions ofthe investee company.
• Investments in subsidiaries. The financial statements may be consolidated
and this is based on control. Control may be obtained in various
circumstances and not solely as a result ofthe power to direct the financial
and operating policies. An investor controls an investee when it is
exposed, or has rights, to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over
the investee. ^

152