ACCO 20093 - Intermediate Accounting 2 1

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
College of Accountancy and Finance

2nd Semester A.Y. 2020-2021
INSTRUCTIONAL MATERIALS FOR
ACCO 20093
INTERMEDIATE
ACCOUNTING 2
COMPILED BY:
Lyra Victoria V. Lascano
Elsa R. Ruado
Mark Anecito R. Perlas
John Carlo G. Abillonar
Noel A. Bergonia
Edelwin T. Fajutagana
Conception M. Vedasto
TABLE OF CONTENTS
Pages
Course Outcome……………………………………………………………………….. 2
Module 1: Intangible Assets……….…………………………………………………... 3-7
Module 2: Investment Property……………………………. ………………………… 8 - 14
Module 3: Non-Current Assets Held for Sale……..………………………………… 15 - 18
Module 4: Investment in Equity Securities…….……………………………………. 19 - 30
Module 5: Investment in Debt Securities…………………………………………….. 31 - 39
Module 6: Financial Liabilities…………………………………………………………. 40 - 63
Grading System ………………………………………………………………………… 64
References/ Reading Materials……………………………………………………….. 64
ACCO 20093: INTERMEDIATE ACCOUNTING 2 1

2nd Sem A.Y.2020-2021
COURSE OUTCOMES
Upon completion of the course, the students will be able to:

• have sound knowledge of the accounting standards applicable to the recognition,
classification, measurement and derecognition of intangible assets, investment property,
non-current assets held for sale, investment in equity and debt securities, and financial
liabilities.
• understand the appropriate presentation of the major asset and liability accounts and
related revenues and expenses in the financial statements, including the appropriate
disclosures.
• apply the accounting standards in the presentation of intangible assets, investment
property, non-current assets held for sale, investment in equity and debt securities, and
financial liabilities, and related revenue and expense items on the financial statements,
including the required disclosures.
• apply the skills in systematic problem solving.
• present computations and financial statements in good form.
• appreciate the importance of appropriate accounting and reporting for various users of
accounting information.
• realize the contributions of accounting standards to the development of a more socially
responsible and morally upright professional accountant.

2nd Sem A.Y.2020-2021
Module 1
INTANGIBLE ASSETS
Overview
An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition
and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets.
Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment,
and inventory.
An intangible asset can be classified as either indefinite or definite. A company's brand
name is considered an indefinite intangible asset because it stays with the company for as long
as it continues operations. An example of a definite intangible asset would be a legal agreement
to operate under another company's patent, with no plans of extending the agreement. The
agreement thus has a limited life and is classified as a definite asset. While an intangible asset
does not have the obvious physical value of a factory or equipment, it can prove valuable for a
firm and be critical to its long-term success or failure.
Module Objectives
After successful completion of this module, you should be able to:
❖ understand the nature of intangibles per IAS 38;
❖ account for the acquisition and amortization of intangibles;
❖ account for subsequent expenditures affecting intangibles;
❖ understand accounting for research and development costs;
❖ recognize impairment of intangible assets (IAS 36);
❖ learn the internal control measures over intangible assets;
❖ determine how and at what amount intangibles are presented on the statement of financial
position; and
❖ identify the required disclosures for intangible assets.
Course Materials
NATURE OF INTANGIBLE ASSETS

Intangible asset: an identifiable non-monetary asset without physical substance. An asset
is a resource that is controlled by the entity as a result of past events (for example, purchase or
self-creation) and from which future economic benefits (inflows of cash or other assets) are
expected. [IAS 38.8] Thus, the three critical attributes of an intangible asset are:
• identifiability
• control (power to obtain benefits from the asset)
• future economic benefits (such as revenues or reduced future costs)
Identifiability: an intangible asset is identifiable when it: [IAS 38.12]
• is separable (capable of being separated and sold, transferred, licensed, rented, or
exchanged, either individually or together with a related contract) or
• arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.
ACQUISITION OF INTANGIBLE ASSETS

IAS 38 requires an entity to recognize an intangible asset, whether purchased or self-
created (at cost) if, and only if: [IAS 38.21]

2nd Sem A.Y.2020-2021
• it is probable that the future economic benefits that are attributable to the asset will flow to
the entity;
• and the cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externally or generated
internally. IAS 38 includes additional recognition criteria for internally generated intangible assets.
The probability of future economic benefits must be based on reasonable and supportable
assumptions about conditions that will exist over the life of the asset. [IAS 38.22] The probability
recognition criterion is always considered to be satisfied for intangible assets that are acquired
separately or in a business combination. [IAS 38.33]
If recognition criteria not met. If an intangible item does not meet both the definition of and
the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to
be recognized as an expense when it is incurred. [IAS 38.68]
Research and development costs

Charge all research cost to expense. [IAS 38.54] Development costs are capitalized only
after technical and commercial feasibility of the asset for sale or use have been established. This
means that the entity must intend and be able to complete the intangible asset and either use it
or sell it and be able to demonstrate how the asset will generate future economic benefits. [IAS
38.57]
If an entity cannot distinguish the research phase of an internal project to create an
intangible asset from the development phase, the entity treats the expenditure for that project as
if it were incurred in the research phase only.
In-process research and development acquired in a business combination

A research and development project acquired in a business combination is recognized as
an asset at cost, even if a component is research. Subsequent expenditure on that project is
accounted for as any other research and development cost (expensed except to the extent that
the expenditure satisfies the criteria in IAS 38 for recognizing such expenditure as an intangible
asset). [IAS 38.34]
Internally generated brands, mastheads, titles, lists

Brands, mastheads, publishing titles, customer lists and items similar in substance that
are internally generated should not be recognized as assets. [IAS 38.63]
Computer software
Purchased: capitalize Operating system for hardware: include in hardware cost Internally
developed (whether for use or sale): charge to expense until technological feasibility, probable
future benefits, intent and ability to use or sell the software, resources to complete the software,
and ability to measure cost. Amortization: over useful life, based on pattern of benefits (straight-
line is the default).
Certain other defined types of costs

The following items must be charged to expense when incurred:
• internally generated goodwill [IAS 38.48]
• start-up, pre-opening, and pre-operating costs [IAS 38.69]
• training cost [IAS 38.69]
• advertising and promotional cost, including mail order catalogues [IAS 38.69]
• relocation costs [IAS 38.69]
Intangible assets are initially measured at cost. [IAS 38.24]

2nd Sem A.Y.2020-2021
SUBSEQUENT RECOGNITION
An entity must choose either the cost model or the revaluation model for each class of
intangible asset. [IAS 38.72]
Cost Model
After initial recognition intangible assets should be carried at cost less accumulated
amortization and impairment losses. [IAS 38.74]
Revaluation Model
Intangible assets may be carried at a revalued amount (based on fair value) less any
subsequent amortization and impairment losses only if fair value can be determined by reference
to an active market. [IAS 38.75] Such active markets are expected to be uncommon for intangible
assets. [IAS 38.78]
Under the revaluation model, revaluation increases are recognized in other comprehensive
income and accumulated in the "revaluation surplus" within equity except to the extent that they
reverse a revaluation decrease previously recognized in profit and loss. If the revalued intangible
has a finite life and is, therefore, being amortized (see below) the revalued amount is amortized.
[IAS 38.85]
Classification of intangible assets based on useful life

Intangible assets are classified as: [IAS 38.88]
• Indefinite life: no foreseeable limit to the period over which the asset is expected to
generate net cash inflows for the entity.
• Finite life: a limited period of benefit to the entity.
Intangible assets with finite lives
The cost less residual value of an intangible asset with a finite useful life should be
amortized on a systematic basis over that life: [IAS 38.97]
The amortization method should reflect the pattern of benefits. If the pattern cannot be
determined reliably, amortize by the straight-line method. The amortization charge is recognized
in profit or loss unless another IFRS requires that it be included in the cost of another asset. The
amortization period should be reviewed at least annually. [IAS 38.104]
An intangible asset with an indefinite useful life should not be amortized. [IAS 38.107] Its
useful life should be reviewed each reporting period to determine whether events and
circumstances continue to support an indefinite useful life assessment for that asset. If they do
not, the change in the useful life assessment from indefinite to finite should be accounted for as
a change in an accounting estimate. [IAS 38.109]
The asset should also be assessed for impairment in accordance with IAS 36. [IAS 38.111]
ASSESSMENT ACTIVITIES
DISCUSSION QUESTIONS
In a separate sheet of paper, kindly copy the questions, then answer.
1. What are the two main characteristics of intangible assets?
2. If intangibles are acquired for stock, how is the cost of the intangible determined?
3. Intangibles have either a limited useful life or an indefinite useful life. How should these
two different types of intangibles be amortized?
4. Why does the accounting profession make a distinction between internally created
intangibles and purchased intangibles?
5. In 2020, Ghostbusters Corp. spent P420,000 for “goodwill” visits by sales personnel to key
customers. The purpose of these visits was to build a solid, friendly relationship for the

2nd Sem A.Y.2020-2021
future and to gain insight into the problems and needs of the companies served. How
should this expenditure be reported?
6. What are factors to be considered in estimating the useful life of an intangible asset?
7. What should be the pattern of amortization for a limited life intangible?
8. Columbia Sportswear Company acquired a trademark that is helpful in distinguishing one
of its new products. The trademark is renewable every 10 years at minimal cost. All
evidence indicates that this trademarked product will generate cash flows for an indefinite
period of time. How should this trademark be amortized?
9. Explain how losses on impaired intangible assets should be reported in income.
10. What is the nature of research and development costs?
PROBLEMS
Show your complete solution, in good accounting form, on a separate sheet of paper.
Problem 1
Americano Co. developed a new machine for manufacturing baseballs. Because the machine is
considered very valuable, the company had patented it. The following expenditures were incurred
in developing and patenting the machine:
Research Salaries and fringe benefits for scientists P100,000
Cost of testing prototype 250,000
Legal cost for filing of patent 230,000
Fees paid to government patent office 140,000
Drawing acquired by patent office to be
filed with patent application 75,000
What amount should be capitalized as cost of patent?
Problem 2
French Vanilla Company commenced operations in the current year. A number of expenditures
were made during the current year that were debited to one account Intangible asset.
Incorporation fees and legal costs related to organizing the
incorporation P150,000
Fire Insurance premium for three-year period 60,000
Legal fees for filing a patent on a new product resulting from an A&B
project 50,000
Purchase of copyright 300,000
Legal fees for successful defense of the patent developed from the
project 50,000
Entered into a 10-year franchise agreement with a franchisor 600,000
Advertising cost 50,000
Purchase of all the outstanding ordinary shares of an acquire. On the
date of purchase, the acquire had fair value of total assets, P6,000,000
and total liabilities of P2,200,000. 5,000,000
What amount should be reported as intangible asset?
Problem 3
During 2019, Latte Inc., spent P5,000,000 developing its new “Hyperion” software package. Of
this amount, P2,200,000 was spent before technological feasibility was established for the
product, which is to be marketed to third parties. The package was completed at December 31,

2nd Sem A.Y.2020-2021
2019. Latte expects a useful life of 8 years for this product with total revenues of P16,000,000.
During the first year (2020), Latte realizes revenues of P3,200,000.
a. What journal entries should have been prepared by the accountant in 2019 for the
foregoing facts?
b. Prepare the entry to record amortization at December 31, 2020.
Problem 4
Arabica Coffee Company acquired patent right on July 1, 2018 for P2,000,000. The asset
has a legal life of 15 years but due to the rapidly changing technology management
estimates a useful life of only 5 years. On January 1, 2019, management is uncertain that
the process can actually be made economically feasible and decides to write down the
patent to an estimated market value of P600,000. Amortization will be taken three years
from this time. On January 1, 2021, after having perfected the related production process,
the asset is now appraised at a sound value of P2,400,000. Furthermore, the estimated
useful life is now believed to have extended by six more years. The company uses the
straight-line method of amortization.
Compute for the following:
a. Amortization expense for 2018
b. Impairment loss to be recognized in 2019
c. Patent carrying value at December 31, 2020
d. Revaluation surplus recognized in 2021
Problem 5
Huagcang Gagalau Company was granted a patent on January 1, 2016 and capitalized
P440,000. The entity was amortizing the patent over the useful life of 15 years.
During 2019, the entity paid P145,000 in successfully defending an attempted

infringement of the patent. After the legal action was completed, the entity sold the patent
to the plaintiff for P800,000. The policy is to take no amortization in the year of disposal.
What amount should be reported as gain from sale of patent in 2019?

2nd Sem A.Y.2020-2021
Module 2
INVESTMENT PROPERTY
Overview
Many accountants falsely believe that there’s only one standard that deals with long-term
tangible assets: PAS 16 Property, Plant and Equipment (PPE). While it’s true that you need to
apply PAS 16 for most of your long-term tangible assets, it’s not the one ruling all. I tried to falsify
this myth some time ago here. Except for IAS 16, we have a few other standards arranging the
long-term assets. PAS 40 Investment Property is one of them.
Under PFRS, investment property is property that an entity holds to earn rental income and/or
capital appreciation. It generates cash flows mostly independently of other assets held by an entity.
It is not property that an entity uses to supply goods or services, nor is it used for administrative
purposes. Examples of investment property are land held for appreciation and a building held for
current or future leases to third parties. Examples of assets that are not investment property are
property intended for sale in the near term, property being constructed for a third party, owner-
occupied property, and property leased to a third party under a finance lease.
Module Objectives
❖ define investment property and differentiate them from owner-occupied assets classified
as PPE;
❖ measure investment property upon initial recognition;
❖ measure investment property after initial recognition;
❖ account for transfer of classification from and into investment property; and
❖ identify required disclosures for investment property.
Course Material
DEFINITION OF INVESTMENT PROPERTY

Investment property – land or a building or part of a building or both held by the owner or by the
lessee under a finance lease to earn rentals or for capital appreciation or both.
Examples of investment property:
a. Land held for long-term capital appreciation
b. Land held for undecided future use
c. Building leased out under an operating lease
d. Vacant building held to be leased out under an operating lease
e. Property under construction as investment property
The following are not investment property and, therefore, are outside the scope of PAS 40:
a. Property held for use in the production or supply of goods or services or for administrative
purposes (PAS 16 Property, plant and equipment)
b. Property held for sale in the ordinary course of business or in the process of construction
of development for such sale (PAS 2 Inventories)
c. Property being constructed or developed on behalf of third parties (PAS 11 Construction
Contracts)
d. Owner-occupied property (Property, Plant and Equipment), including property held for
future use as owner-occupied property, property held for future development and
subsequent use as owner-occupied property, property occupied by employees and owner-
occupied property awaiting disposal
e. Property leased to another entity under a finance lease (PAS 17/PFRS 16 Leases).

2nd Sem A.Y.2020-2021
OTHER CLASSIFICATION ISSUES
Property held under an operating lease

A property interest that is held by a lessee under an operating lease may be classified and
accounted for as investment property provided that:
The rest of the definition of investment property is met
• The operating lease is accounted for as if it were a finance lease in accordance with IFRS
16
• The lessee uses the fair value model set out in this Standard for the asset recognized.
• An entity may make the foregoing classification on a property-by-property basis.
Partial own use - If the owner uses part of the property for its own use, and part to earn rentals
or for capital appreciation
➢ If the portions can be sold or leased out separately, they are accounted for separately.
Therefore, the part that is rented out is investment property.
➢ If the portions cannot be sold or leased out separately, the property is investment property
only if the owner-occupied portion is insignificant.
Ancillary services - If the enterprise provides ancillary services to the occupants of a property
held by the enterprise, the appropriateness of classification as investment property is determined
by the significance of the services provided.
➢ If those services are a relatively insignificant component of the arrangement as a whole
(for instance, the building owner supplies security and maintenance services to the
lessees), then the enterprise may treat the property as investment property.
➢ Where the services provided are more significant (such as in the case of an owner-
managed hotel), the property should be classified as owner-occupied.
Intracompany rentals - Property rented to a parent, subsidiary, or fellow subsidiary

➢ Not investment property in consolidated financial statements that include both the
lessor and the lessee, because the property is owner-occupied from the perspective of
the group.
➢ However, such property could qualify as investment property in the separate financial
statements of the lessor, if the definition of investment property is otherwise met.
RECOGNITION
➢ Investment property should be recognized as an asset
a. When it is probable that the future economic benefits that are associated with the
property will flow to the enterprise
b. The cost of the property can be reliably measured.
Initial measurement
➢ Investment property is initially measured at cost, including transaction costs.
➢ Such cost should not include start-up costs, abnormal waste, or initial operating losses
incurred before the investment property achieves the planned level of occupancy.
Measurement subsequent to initial recognition

After initially recognizing the investment property at cost, an enterprise may choose between the:
➢ Fair value model; or
➢ Cost model

2nd Sem A.Y.2020-2021
➢ One method must be adopted for all of an entity's investment property. Change is
permitted only if this results in a more appropriate presentation. PAS 40 notes that this is
highly unlikely for a change from a fair value model to a cost model.
Fair value model

a. Investment property is remeasured at fair value, which is the amount for which the
property could be exchanged between knowledgeable, willing parties in an arm's length
transaction. Gains or losses arising from changes in the fair value of investment property
must be included in net profit or loss for the period in which it arises.
b. Fair value should reflect the actual market state and circumstances as of the end of the
reporting period. The best evidence of fair value is normally given by current prices on an
active market for similar property in the same location and condition and subject to similar
lease and other contracts. In the absence of such information, the entity may consider
current prices for properties of a different nature or subject to different conditions, recent
prices on less active markets with adjustments to reflect changes in economic conditions,
and discounted cash flow projections based on reliable estimates of future cash flows.
c. There is a rebuttable presumption that the enterprise will be able to determine the fair
value of an investment property reliably on a continuing basis. However, if, in exceptional
circumstances, an entity follows the fair value model but at acquisition concludes that a
property's fair value is not expected to be reliably measurable on a continuing basis, the
property is accounted for in accordance with the benchmark treatment under PAS 16,
Property, Plant and Equipment (cost less accumulated depreciation less accumulated
impairment losses).
d. Where a property has previously been measured at fair value, it should continue to be
measured at fair value until disposal, even if comparable market transactions become less
frequent or market prices become less readily available.
Cost Model
a. After initial recognition, investment property is accounted for in accordance with the cost
model as set out in PAS 16, Property, Plant and Equipment – cost less accumulated
depreciation and less accumulated impairment losses.
TRANSFERS TO OR FROM INVESTMENT PROPERTY CLASSIFICATION

Transfers to, or from, investment property should only be made when there is a change
in use, evidenced by:
➢ Commencement of owner-occupation (transfer from investment property to owner-
occupied property)
➢ Commencement of development with a view to sale (transfer from investment property to
inventories)
➢ End of owner-occupation (transfer from owner-occupied property to investment property);
➢ Commencement of an operating lease to another party (transfer from inventories to
investment property)
➢ End of construction or development (transfer from property in the course of
construction/development to investment property.
➢ When an entity decides to sell an investment property without development, the property
is not reclassified as investment property but is dealt with as investment property until it is
disposed of.

2nd Sem A.Y.2020-2021
Accounting for Transfers to and from Other Classifications
From Transferred Category Treatment

Fair value at the change of
Investment property carried Owner-occupied property or use is the 'cost' of the
at fair value inventories property under its new
classification
Difference in carrying
Investment property carried
Owner-occupied property amount and fair value as
at fair value
revaluation under PAS 16
Difference in carrying
Investment property at fair
Inventories amount and fair value is
value
recognized in profit or loss.
Difference between the fair
value at the date of transfer
Completed investment
Investment property under and the previous carrying
property that will be carried
construction or development amount should be
at fair value
recognized in net profit or
loss
Investment property under Owner-occupied property or No change the carrying
the cost model inventories amount of the property
transferred
DISPOSALS
➢ An investment property should be derecognized on disposal or when the investment
property is permanently withdrawn from use and no future economic benefits are expected
from its disposal.
➢ The gain or loss on disposal is the difference between the net disposal proceeds and the
carrying amount of the asset and recognized in profit or loss.
➢ Compensation from third parties is recognized when it becomes receivable.
PRESENTATION ON THE STATEMENT OF FINANCIAL POSITION

As required by PAS 1, investment property shall be separately shown as a line item on
the face of statement of financial position and is classified as a non-current asset.
Disclosures under the Fair Value Model and Cost Model

a. Whether the fair value or the cost model is used
b. If the fair value model is used, whether property interests held under operating leases are
classified and accounted for as investment property;
c. If classification is difficult, the criteria to distinguish investment property from owner-
occupied property and from property held for sale.
d. The methods and significant assumptions applied in determining the fair value of
investment property.
e. The extent to which the fair value of investment property is based on a valuation by a
qualified independent valuer; if there has been no such valuation, that fact must be
disclosed.
f. The amounts recognized in profit or loss for:
➢ Rental income from investment property;

2nd Sem A.Y.2020-2021
➢ Direct operating expenses (including repairs and maintenance) arising from
investment property that generated rental income during the period; and
➢ Direct operating expenses (including repairs and maintenance) arising from
investment property that did not generate rental income during the period.
g. Restrictions on the realizability of investment property or the remittance of income and
proceeds of disposal.
h. Contractual obligations to purchase, construct, or develop investment property or for
repairs, maintenance or enhancements.
Additional Disclosures for the Fair Value Model

• a reconciliation between the carrying amounts of investment property at the beginning and
end of the period, showing additions, disposals, fair value adjustments, net foreign
exchange differences, transfers to and from inventories and owner-occupied property, and
other changes
• significant adjustments to an outside valuation (if any)
• if an entity that otherwise uses the fair value model measures an item of investment
property using the cost model, certain additional disclosures are required
Additional Disclosures for the Cost Model

• the depreciation methods used
• the useful lives or the depreciation rates used
• the gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period
• a reconciliation of the carrying amount of investment property at the beginning and end of
the period, showing additions, disposals, depreciation, impairment recognized or
reversed, foreign exchange differences, transfers to and from inventories and owner-
occupied property, and other changes
• the fair value of investment property. If the fair value of an item of investment property
cannot be measured reliably, additional disclosures are required, including, if possible, the
range of estimates within which fair value is highly likely to lie
PFRS for SMEs, Sec. 16 Investment Property, requires SMES to measure Property
Investments initially at cost including costs incurred to bring it into use and subsequently measure
at each balance sheet date at FMV, with the fair value movements to be recognized in the profit
or loss. If fair value cannot be determined without undue cost or effort, the real property shall be
treated as PPE. When fair value of investment property is no longer available without undue cost
or effort, the investment shall become PPE. This is a change in circumstance therefore, treated
currently and prospectively.
1. How is an investment property distinguished from owner-occupied property? From
inventories?
2. Give instances when an is classified “from” and “into” investment property.
3. How are the assets classified as investment property measured in the statement of
financial position?
4. Are assets held for rental classified as investment property? Discuss.
5. Differentiate accounting treatment subsequent to initial recognition of investment
properties using cost and fair value model.

2nd Sem A.Y.2020-2021
PROBLEMS
Problem 1
Indicate which of the following items will be reported as Investment property.
a. Building occupied as factory site
b. Land held for capital appreciation
c. Land held for undetermined future use
d. Building that houses materials for construction
e. Condominium units in the building that is being constructed for sale in ordinary course of
business
f. Vacant building that is intended to be leased out under operating leases
g. Machinery held for rental
h. Property constructed on behalf of a third party
Problem 2
The Buckethead Company has a single investment property which had originally cost P580,000
on 1 January 2017. At 31 December 2019 its fair value was P600,000 and at 31 December 2010
it had a fair value of P590,000. On acquisition, the property had a useful life of 40 years.
What should be the expense recognized in Buckethead's profit or loss for the year ending
31 December 2020 under each of the fair value model and the cost model?
Problem 3
The Conehead Company purchased an investment property on January 1, 2017 for a cost of
P220,000. The property had a useful life of 40 years and on December 31, 2019 had a fair value
of P300,000. On January 1, 2020, the property was sold for net proceeds of P290,000. Conehead
uses the cost model to account for investment properties.
What is the gain or loss to be recognized in profit or loss for the year ended December
312020 regarding the disposal of the property?
Problem 2-4
Bangon Cagayanon Corporation acquired a building on January 1, 2021. The acquisition cost
was P= 5,000,000 payable at the rate of P = 1M at the beginning of each year starting January 1,
2021. The company paid option money totaling P = 400,000, P
= 85,221 of which is attributed to real
properties not acquired. The company also paid property taxes in arrears as of January 1, 2021
at P
= 147,872. The prevailing market rate of interest for transaction is 12%. The building is
estimated to have useful life of 25 Years.
The property was appraised at the end of each year as follows:

2021 2020 2021
Appraised values P
= 4,600,000 P = 4,100,000 P
= 4,300,000
Required:
1. How much the property should be initially recognized?
2. What is the carrying value property of the as of December 31, 2020, assuming that
the building is an owner-occupied property?
3. Using the information in number 2, how much impairment loss should be
recognized from the asset in the 2020 profit or loss?

2nd Sem A.Y.2020-2021
4. What is the carrying value of the property as of December 31, 2021, assuming that
the building is an investment property under the cost method?
5. Using the information in number 4, how much impairment recovery gain should be
recognized from the asset in the 2021 profit or loss?
6. Assuming that the building is originally categorized as owner occupied upon
acquisition but was transferred to investment property at the end of 2021, how much
gain or loss from transfer should be recognized in the income statement assuming
that investment properties are carried at fair value method?
7. Assuming that the building is originally categorized as investment property upon
acquisition but was transferred to owner-occupied property at the end of 2021, how
much gain or loss from transfer should be recognized in the income statement
assuming that investment properties are carried at fair value method?

2nd Sem A.Y.2020-2021
Module 3
NON-CURRENT ASSETS HELD FOR SALE
Overview
When a company makes the decision to sell an asset or to stop some part of its business,
it is making a decision that affects the future cash flows, profitability, and overall financial situation.
The users of the financial statements should be informed about these events. Therefore, PFRS 5
Non-Current Assets Held for Sale and Discontinued Operations was issued to highlight the results
from continued operations and to separate them from the results of the ongoing activities.
PFRS 5 outlines how to account for non-current assets held for sale (or for distribution to
owners). In general terms, assets (or disposal groups) held for sale are not depreciated, are
measured at the lower of carrying amount and fair value less costs to sell and are presented
separately in the statement of financial position. Specific disclosures are also required for
discontinued operations and disposals of non-current assets.
Assets classified as non-current in accordance with PAS 1 Presentation of Financial
Statements shall not be reclassified as current assets until they meet the criteria to be classified
as held for sale in accordance with this PFRS. Assets of a class that an entity would normally
regard as non-current that are acquired exclusively with a view to resale shall not be classified as
current unless they meet the criteria to be classified as held for sale in accordance with this PFRS.
Module Objectives
❖ define non-current assets held for sale and identify the conditions required for asset/s to
be classified as held for sale;
❖ measure non-currents assets held for sale upon initial recognition;
❖ measure non-current assets held for sale after initial recognition; and
❖ identify required disclosures for non-current assets held for sale.
Course Material
SCOPE
• Classification and presentation requirements apply to all non-current assets and disposal
groups (as a whole)
REQUISITE TO BE HELD FOR SALE:

• Carrying value of the asset is to be recovered principally through a sale transaction.
• The asset is available for immediate sale and sale is highly probable.
HIGHLY PROBABLE MEANS:

• The appropriate level of management must be committed to a plan to sell the asset (or
disposal group)
• The asset is available for immediate sale
• An active program to locate a buyer and complete the plan must have been initiated
• The asset (or disposal group) must be actively marketed for sale at a price that is
reasonable in relation to its current fair value.
• The sale should be expected to qualify for recognition as a completed sale within one year
from the date of classification
• Actions required to complete the plan should indicate that it is unlikely that significant
changes to the plan will be made or that the plan will be withdrawn

2nd Sem A.Y.2020-2021
NONCURRENT ASSETS EXCLUSIVELY ACQUIRED WITH A VIEW TO ITS SUBSEQUENT
DISPOSAL
• Classify the non-current asset (or disposal group) as held for sale at the acquisition date
only if the one-year requirement in is met, and
• It is highly probable that the other requisites will be met within a short period following the
acquisition (3 months)
NCA HELD FOR SALE REQUIREMENTS MET AFTER THE END OF THE REPORTING
PERIOD
• An entity shall not classify a non-current asset (or disposal group) as held for sale in those
financial statements when issued.
• When those criteria are met after the reporting period but before the authorization of the
financial statements for issue, the entity shall make appropriate disclosures
NONCURRENT ASSETS TO BE ABANDONED

• An entity shall not classify as held for sale a non-current asset (or disposal group) that is
to be abandoned. This is because its carrying amount will be recovered principally through
continuing use.
• An entity shall not account for a non-current asset that has been temporarily taken out of
use as if it had been abandoned.
MEASUREMENT NCA HELD FOR SALE OR DISPOSAL GROUP

• Immediately before the initial classification of the asset as held for sale, the carrying
amount of the asset will be measured in accordance with applicable PFRSs.
• Lower of its carrying amount and fair value less costs to sell.
• When the sale is expected to occur beyond one year, the entity shall measure the costs
to sell at their present value.
• Gains for any subsequent increase in fair value less costs to sell of an asset is recognized,
but not in excess of the cumulative impairment loss that has been recognized.
• An entity shall not depreciate (or amortize) a non-current asset while it is classified as held
for sale or while it is part of a disposal group classified as held for sale.
• Impairment must be considered both at the time of classification as held for sale and
subsequently:
At the time of classification as held for sale. Immediately prior to classifying an
asset or disposal group as held for sale, impairment is measured and recognized in
accordance with the applicable PFRSs (generally PAS 16 Property, Plant and Equipment,
PAS 36 Impairment of Assets, PAS 38 Intangible Assets, and PAS 39 Financial
Instruments: Recognition and Measurement/PFRS 9 Financial Instruments). Any
impairment loss is recognized in profit or loss unless the asset had been measured at
revalued amount under PAS 16 or PAS 38, in which case the impairment is treated as a
revaluation decrease.
After classification as held for sale. Calculate any impairment loss based on the
difference between the adjusted carrying amounts of the asset/disposal group and fair
value less costs to sell. Any impairment loss that arises by using the measurement
principles in PFRS 5 must be recognized in profit or loss, even for assets previously carried
at revalued amounts.

2nd Sem A.Y.2020-2021
CHANGE IN CLASSIFICATION
• Measured at the lower of:
a) Its carrying amount before the asset (or disposal group) was classified as held for
sale, adjusted for any depreciation, amortization or revaluations that would
have been recognized had the asset (or disposal group) not been classified as
held for sale, and
b) Its recoverable amount at the date of the subsequent decision not to sell
• The entity shall include any required adjustment to the carrying amount of a non-current
asset that ceases to be classified as held for sale in profit or loss from continuing
operations in the period the NCA ceases to be classified as held for sale.
Financial Statement Presentation

Assets classified as held for sale, and the assets and liabilities included within a disposal
group classified as held for sale, must be presented separately on the face of the statement of
financial position.
Financial Statement Disclosures

PFRS 5 requires the following disclosures about assets (or disposal groups) that are held
for sale:
• description of the non-current asset or disposal group
• description of facts and circumstances of the sale (disposal) and the expected timing
• impairment losses and reversals, if any, and where in the statement of comprehensive
income they are recognized
• if applicable, the reportable segment in which the non-current asset (or disposal group) is
presented in accordance with PFRS 8 Operating Segments
1. What are the conditions required for a non-current asset to be classified as held for sale?
2. How is a non-current asset or a disposal group held for sale measured in the financial
statements?
3. When is the sale of a non-current asset considered to be highly probable?
4. How are non-current assets held for sale shown on the face of the statement of financial
position?
5. How to account for changes in classification of non-current asset to non-current asset held
for sale?
PROBLEMS
Problem 1
A piece of equipment with a carrying value of P 42,000 on January 1, 2020 meets the criteria for
classification as Held for Sale on March 31, 2020. The equipment is being depreciated over 5
years on a straight-line basis and has a remaining life of 3 years as of January 1, 2020. The
following additional information is available:

2nd Sem A.Y.2020-2021
Fair value less cost to sell on March 31, 2020 P 36,000
Fair value less cost to sell on December 31, 2020 40,000
Required:
1. Give the entries on March 31, 2020 and December 31, 2020 as a result of foregoing.
2. Assume instead that the fair value less cost to sell on December 31, 2020 decreased
to P35,000. Give the entry on December 31, 2015.
Problem 2
On January 1, 2020, IT’S SHOWTIME Corporation decided to dispose of an item of plant that is
carried in its records at a cost of P = 900,000, with accumulated depreciation of P = 160,000.
Depreciation on the plant since it was originally acquired has been charged of P = 10,000 per month.
The plant will continue to be operated until it is sold, at which time the operations of the plant will
be outsourced. The company undertook all the necessary actions to be able to classify the asset
as held for sale. It is estimated that it could sell the plant for its fair value, P
= 720,000, incurring
P
= 20,000 selling costs in the process. The plant has been depreciated at an amount of P = 10,000
per month.
On March 31, 2020, the plant had not been sold but, due to shortage of this type of plant, there
= 770,000. On June 30, 2020, IT’S SHOWTIME sold
had been an increase in the fair value to P
the plant for P
= 785,000 incurring P
= 25,000 selling costs.
The depreciation expense to be recognized in 2020 is ______________.

2nd Sem A.Y.2020-2021
Module 4
INVESTMENT IN EQUITY SECURITIES
Overview
Investments defined as the 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. These are
the assets not directly identified with the central revenue producing activities of the enterprise.
One category of a financial asset is the equity securities. Equity securities are those that represent
ownership in a company or rights to acquire ownership in a company or rights to acquire
ownership interests at an agreed-upon or determinable price and this is based on the intention of
the holding entity and the level of influence acquired by the investor over the operating and
financial policies of the investee.
Module Objectives:
❖ understand the nature of investment in equity securities;
❖ classify investments in equity securities in accordance with IFRS 9;
❖ measure investment at the date of initial recognition;
❖ formulate entries for transactions affecting investment in equity securities subsequent to
acquisition;
❖ measure investment in equity securities at the end of the reporting period and account for
changes in their carrying amount;
❖ apply the principles for reclassification of investment in equity securities
❖ present investment in equity securities and the resulting accounts and information in the
financial statements; and
❖ identify the required disclosures for investment in equity securities.
Course Material
ACCOUNTING FOR INVESTMENTS
OWNERSHIP DEGREE OF INFLUENCE APPLICABLE STANDARD

Less than 20% No significant influence IFRS 9 – Financial
(Investments in financial Instruments
assets)
20% - 50% Significant Influence IAS 28 – Investment in
(Investment in Associates) Associates
More than 50% Control IFRS 10 – Consolidated
(Business Combinations) Financial Statements
CLASSIFICATION OF EQUITY INVESTMENTS

1. Equity Investments at Fair Value through Profit or Loss (FVTPL). These are the
investments held for trading and there is neither control nor significant influence in the
operating & financial policies of the investee company. Hence, this is the default
classification of investment in equity securities.
They are initially recognized at cost (generally, the purchase price is the fair value at the
date of acquisition). Any transaction cost directly attributable to its acquisition is recorded
as expense. The journal entry to recognize its acquisition and year-end valuation,
respectively, are:

2nd Sem A.Y.2020-2021
Equity Investments at Fair Value through Profit or Loss xx
Brokers’ Commission (or equivalent expense account) xx
Cash xx
Equity Investments at Fair Value through Profit or Loss (FVTPL) xx

Unrealized Gain on Equity Investments at FVTPL xx
(if the market value at year-end > cost)
Unrealized Loss on Equity Investments at FVTPL xx

Equity Investments at Fair Value through Profit or Loss (FVTPL) xx
(if the market value at year-end < cost)
At each reporting date, the equity investments at FVTPL are adjusted at its fair market
value. Any increase or decrease in equity investments at FVTPL is recognized and
reported as part of the entity’s profit or loss for the period on the statement of
comprehensive income.
Upon sale or disposal of equity investments at FVTPL, any gain or loss is to be recognized
for the difference between the sales price or proceeds & the most recently recorded fair
value and it is reported in the profit & loss section in the statement of comprehensive
income. The journal entry to recognize the sale of equity investments at FVTPL is:
Cash (amount of proceeds or sales price) xx

Equity Investments at FVTPL (most recent market price) xx
Gain on Sale of Equity Investments at FVTPL xx
[ if sales price > market price]
Cash (amount of proceeds or sales price) xx

Loss on Sale of Equity Investments at FVTPL xx
Equity Investments at FVTPL (most recent market price) xx
[ if sales price < market price ]
2. Equity Investments at Fair Value through Other Comprehensive Income (FVTOCI).

These are the investments held for non-trading and there is neither control nor significant
influence in the operating & financial policies of the investee company. The investor, at
the date of initial recognition, makes an irrevocable choice of designing the securities as
FVTPL or FVTOCI. They are initially recognized at cost (generally, the purchase price is
also the fair value at the date of acquisition) plus any transaction cost directly attributable
to its acquisition. The journal entry to recognize its acquisition and year-end valuation,
respectively, are:
Equity Investments at Fair Value through OCI xx

Cash xx

Unrealized Gain on Equity Investments at FVTOCI xx
(if the market value at year-end > cost)
Unrealized Loss on Equity Investments at FVTOCI xx
(if the market value at year-end < cost)

2nd Sem A.Y.2020-2021
At each reporting date, the equity investments at FVTOCI are adjusted at its fair market
value. Any increase or decrease in equity investments at FVTOCI is likewise recognized
and reported to other comprehensive income (OCI) in the statement of comprehensive
income.
Upon sale or disposal of equity investments at FVTOCI, it is first adjusted to its fair value
(fair value is presumed its selling price), then the sale is recorded without recognizing any
profit or loss. The journal entry to recognize the sale of equity investments at FVTOCI is:

(if the sales price > most recent market price before disposal)

(if the sales price < most recent market price before disposal)
Cash xx
(the amount recognized is equal to the sales price at the date of sale.)
The accumulated or cumulative balance of unrealized gains and losses on equity

investments at fair value through other comprehensive income (FVTOCI) shall remain in
equity and not taken or reversed to profit or loss. However, it may be transferred or
reclassified directly to retained earnings, as follows:

Retained Earnings xx
Retained Earnings xx
The amount transferred to retained earnings is the difference between the net selling
(sales) price and the initial cost of investment.
3. Investments in Associates. The investor classified the equity investments as investment

in associates when it has the ability to participate in the operating and financial policy
decisions of the investee company. As defined in IAS 28, an associate is an entity over
which the investor has significant influence. Significant influence is the power to
participate in the financial and operating policy decisions of the investee but is not control
or joint control of those policies.
The existence of significant influence by an entity is usually evidenced in one or more of

the following ways (IAS 28, paragraph 6):
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about
dividends or other distributions;
(c) material transactions between the entity and its investee;
(d) interchange of managerial personnel; or
(e) provision of essential technical information.

2nd Sem A.Y.2020-2021
The existence and effect of potential voting rights that are currently exercisable or
convertible, including potential voting rights held by other entities, are considered when
assessing whether an entity has significant influence. Potential voting rights are not
currently exercisable or convertible when, for example, they cannot be exercised or
converted until a future date or until the occurrence of a future event. When potential voting
rights or other derivatives containing potential voting rights exist, an entity’s interest in an
associate or a joint venture is determine solely on the basis of existing ownership interests
and does not reflect the possible exercise or conversion of potential voting rights. (IAS 28,
paragraph 8 and 12).
EQUITY METHOD
Investment in Associate uses equity method. The use of equity method is described as
follows:
The investment in an associate or a joint venture is initially recognized at purchase price

plus transaction costs.
Investment in Associate xx
Cash* xx
* or appropriate account title representing the consideration given
The carrying amount of the investment is increased or decreased to recognize the

investor’s share of the profit or loss of the investee after the date of acquisition. The
investor’s share of the investee’s profit or loss is recognized in the investor’s profit or loss.
Share in Profit of Associate xx
On the date of acquisition, the fair value of the investee’s net assets exceeds their carrying
amount, the excess shall be amortized, as appropriate, as an adjustment to the investment
account and to the share in profit of associate. Adjustments to the carrying amount may
also be necessary for changes in the investor’s proportionate interest in the investee
arising from changes in the investee’s other comprehensive income. Such changes
include those arising from the revaluation of property, plant and equipment and from
foreign exchange translation differences. (IAS 28, paragraph 10).
Any further excess of the cost of the investment and the investor’s share of the fair values
in net identifiable net assets of the associate at the date of acquisition of the investment
is attributable to goodwill. However, goodwill is not separately recognized and is carried
in the investment balance. Goodwill is not subject to amortization but is tested for
impairment, at least annually. If goodwill is assessed as impaired, the investor shall take
up its proportionate share in impairment loss as follows:
If the cost of the investment is less than the equity in the fair value of the net identifiable
assets of the associate, indicating a bargain purchase for the investment, the investor shall
take up the difference as an adjustment in its share of profit of the associate in the period
of acquisition. The entry for such adjustment is

2nd Sem A.Y.2020-2021
Distributions (dividends) received or receivable from an investee reduce the carrying
amount of the investment. The entry to recognize for the receipt of dividend is
Cash or Dividends Receivable xx
DISPOSAL OF INVESTMENT IN ASSOCIATE

When an investor that accounts for investment in associate using the equity method
disposes of some or all of the shares held, the difference between the net disposal
proceeds and the carrying value of the investment using the equity method shall be
recognized as gain or loss in the profit or loss section in the statement of comprehensive
income. If the net proceeds exceed the carrying value of the investment, the entry for sale
is
Cash xx
Gain on Sale of Investment xx
If the carrying value exceeds the net proceeds of the investment, the entry for sale is
Cash xx
Loss on Sale of Investment xx
RECLASSIFICATION OF EQUITY SECURITIES

A. Reclassification from investment in associate to investment at fair value
When an investor accounts for investment in associate using equity method loses
its significant influence over the investee company (because of sale of a portion of
investment or through other means), the investor shall discontinue the use of
equity method and shall reclassify the investment as at fair value (irrevocable
choice of measuring at fair value through profit or loss or through other
comprehensive income), as a result, the securities shall be transferred at fair
value at the date of reclassification and the difference between the fair value of
the retained investment and its previous carrying value is reported in the profit or
loss.
The journal entry to recognize the reclassification, if the fair value exceeds the
investment’s carrying value at the date when the significant influence is lost:
Equity Investments (at Fair Value) xx
Gain from Reclassification of Investment xx
B. Reclassification from investment in associate to investment at fair value

An investment originally classified as equity investments at fair value may
subsequently give the investor significant influence by acquiring additional shares.
The securities are reclassified as investment in associates using the equity method
if the investor does not have the intention to dispose the shares within 12 months
from the date significant influence is acquired. The fair value at the date of
reclassification shall be considered as the initial cost of the Investment in
Associate.
The journal entry to recognize reclassification is (after the adjustment for fair value)
Equity Investments (at Fair Value) xx

2nd Sem A.Y.2020-2021
4. 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 of the 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.
ACCOUNTING FOR DIVIDENDS AND STOCK RGHTS

Dividends – Distribution of earnings paid to shareholders based on the number of shares owned.
The most common type of dividend is a cash dividend. Dividends may be issued in other forms
such as stock and property.
Dividends are typically recognized as income by the investor/shareholder, unless it is a

liquidating dividend, the equity method is being applied or the dividends are in the form of
shares.
Cash dividends are recognized as income regardless whether the dividends come from the
cumulative net income after the date of the investment (post acquisition retained earnings) or net
income prior to the acquisition of the investment (pre-acquisition retained earnings). Previously,
it was addressed in a PFRS that dividends from pre-acquisition retained earnings are liquidating
dividends. This treatment has now been superseded by revisions to PAS 27.
Basic rules on dividends

a. Cash dividends – Income recognized at the date of declaration, which is the date the board
of directors announces its intention to pay dividends.
b. Property dividends – Income at fair value.
c. Stock or share dividends – Recorded as a memorandum entry, however two important
cases to take note of:
1. A different class of shares received other than the original investment known as
“special stock dividends” shall be recognized as a new investment, therefore the
total cost of the investment shall be allocated using the “relative fair value method”.
A common accounting problem considered under these cases will be if only a single
fair value is given. In this instance, the available fair value shall simply be deducted
from the total cost and the difference shall be the value allocated to the remaining
investment.
2. Stock dividends will also reduce the cost per share as a result of the same or original
cost being allocated to a larger number of shares. This will of course be a factor in
subsequent sale transactions related to the investment.
When Are Shareholders Entitled to Dividends?

As mentioned earlier, dividends are recognized as income at the date of declaration.
Meaning, dividends receivable shall be debited and a corresponding credit to dividend income.
But to determine whether the shareholder should get a dividend, you need to look at two important
dates. They are the "record date" or "date of record" and the "ex-dividend date" or "ex-date."
When a company declares a dividend, it sets a record date when the shareholder must be on the
company's books as a shareholder to receive the dividend. Companies also use this date to
determine who is sent financial reports and other information. Once the company sets the record
date, the ex-dividend date is set based on stock exchange rules. The ex-dividend date is usually
set for stocks two business days before the record date. If a buyer purchases the stock on its
ex-dividend date or after, they will not receive the next dividend payment. Instead, the seller gets

2nd Sem A.Y.2020-2021
the dividend. If the buyer purchases before the ex-dividend date meaning “dividend on”, the buyer
will get the dividend.
Accounting for Stock Rights

Stock rights are issued to shareholders in order to maintain their proportionate ownership interest
in the corporation when new shares are issued at a discounted price compared to a public offering
and for a limited period only usually several weeks. The ratio is one stock right for every share
owned by a shareholder. However, the number of stock rights to buy one additional share shall
not be the same. There are opposing views in accounting for stock rights and the illustration
below will show both.
Let us assume that a shareholder has 50,000 shares with a total cost of 5,000,000 or 100 per
share and is issued 50,000 stock rights to acquire 10,000 shares at 140 each. The fair value of
the shares is 160 each and the stock right is 10 each.
Accounted for Separately Not Accounted for Separately
Total Fair Value of SR (50,000 x 10) 500,000 Only a “memo entry” is recorded for the receipt
of the stock rights. And the exercise and
Journal Entry: acquisition of the shares shall only be the
exercise price.
Investment in Stock Rights 500,000
Investment in Stocks 500,000 Exercise price (10,000 x 140) 1,400,000
Exercise price (10,000 x 140) 1,400,000 Journal Entry:

Cost of stock rights exercise 500,000
Total cost of new investment 1,900,000 Investment in Stocks 1,400,000
Cash 1,400,000
Journal Entry:
Investment in Stocks 1,900,000

Cash 1,400,000
Investment in Stocks 500,000
• Accounting for stock rights separately has been the traditional approach followed for
several decades already although unlike before where the total cost of the investment is
multiplied by the fraction that can be developed by adding the fair value of the share and
the stock right (example: 5,000,000 x 10/170) depending whether the shares are quoted
“right-on” or “ex-right”. The fair value is simply used as the value to be allocated as the
separate investment of the stock rights based on the theoretical basis under PFRS 9 that
“all investments and contracts on those instruments must be measured at fair value”
• If stock rights are not accounted for separately, this is in line with another instrument
described in PFRS 9 known as embedded derivatives where the stock rights can be
rightfully classified. Embedded derivatives shall not be separated from the host contract
if the host contract is a financial asset. Of course, the investment in stocks is a financial
asset.
• That’s why it will be wise to proceed with caution and identify the requirements specifically
mentioned in the problem on how to treat stock rights since both treatments are acceptable
under PFRS 9.
Theoretical Value of Stock Rights

This is a formula that shall be applied to derive the fair value of the stock rights in case it is not
determinable in a specific situation. There are two applications of the formula depending whether
the shares are quoted “right-on” or “ex-right”.

2nd Sem A.Y.2020-2021
RIGHT-ON EX-RIGHT
Market value of share less Exercise Price Market value of share less Exercise Price
Number of rights to purchase one share + 1 Number of rights to purchase one share
The formulas are identical except for one little detail, the denominator for the “right-on” formula
shall have a plus 1 factor to represent the market value of the stock right that is included in the
market value of the share since it is quoted “right-on”.
Let’s assume that 50,000 shares are acquired for 5,000,0000 and 50,000 rights are issued to
purchase 12,500 shares or 4 rights to purchase on share at an exercise price of 100. The shares
are quoted at 125 and stock rights shall be accounted for separately.
The market value of the stock rights if “right-on” is 5 (125 – 100) / (4 + 1) and 6.25 is “ex-right”
(125 – 100) / 4. The cost of the new investment shall be
RIGHT-ON EX-RIGHT
Exercise price (12,500 x 100) 1,250,000 Exercise price (12,500 x 100) 1,250,000
Cost of stock rights (5 x 250,000 Cost of stock rights (6.25 x 312,500
50,000) 50,000)
Total cost of new investment 1,500,000 Total cost of new investment 1,562,500
Shares in lieu of cash dividends and cash in lieu of stock dividends

Let us assume that 50,000 shares are acquired at a cost of 3,000,000.
Situation 1: A dividend per share of 20 is declared but 5,000 shares with a fair value of 150 each
is issued
Situation 2: A 20% stock dividend is declared but instead cash dividends of 600,000 are received
Under situation 1, shares in lieu of cash, this shall be recognized as a property dividend and be
recorded as income at 750,000 (5,000 x 150), the fair value of the shares received. If the fair
value of the shares is not available, the amount of income shall be 1,000,000 (50,000 x 20)
Under situation number 2, cash in lieu of stock dividends, the “as if sold approach” shall be
followed. Step 1 will be to compute for the new cost per share if the share dividends were received
which is 50 per share (3,000,000 / 50,000 + 10,000 (20% x 50,000)). Then the number of share
dividends that would have been received shall be multiplied by 50 and compared to amount of
cash dividends received and a gain or loss on sale shall be recognized. Therefore, the gain is
100,000 (600,000 less (50 x 10,000))
PROBLEMS
For problems that needs solutions, show them in good accounting form, on a separate sheet of
paper.
1. Equity securities acquired for trading shall be measured at
a. Cost, being the purchase price plus transaction costs
b. Cost, being the purchase price
c. Fair value, with change in fair value taken to profit or loss
d. Fair value, with change in fair value taken to other comprehensive income

2nd Sem A.Y.2020-2021
2. Under which type of investment classification is directly attributable cost of acquisition not
included in the initial measurement basis?
a. Investment in associate
b. Financial assets at amortized cost
c. Financial assets at fair value through profit or loss
d. Financial assets at fair value through other comprehensive income
3. An instrument representing ownership shares and the right to acquire ownership shares
a. Debt Security
b. Equity Security
c. Shareholder's Equity
d. Treasury Bills
4. Which one of the following indicates that the investor does not exercise significant
influence over the investee?
a. Majority ownership of the investee is concentrated among a small group of
shareholders who operate the investee without regard to the views of the investor.
b. There is interchange of managerial personnel between the investor and the investee.
c. There are material intercompany transactions between investor and investee.
d. The investor has representation in the investee's board of directors.
5. An investor uses equity method to account for investment in associate. The purchase
price implies a fair value of the investee's depreciable assets in excess of the investee's
net asset carrying values. The investor's amortization of the excess
a. Decreases goodwill account.
b. Decreases the investment in associate account.
c. Increases the investment income account.
d. Does not affect the carrying value of the investment.
6. Investment in associate gives the holder of the securities the power to participate in (but
not to govern) the financial and operating policy decisions of the investee. Cash dividends
received by the holder of securities from the associate will:
a. Be credited to dividend income.
b. Be debited to Dividends Payable.
c. Be credited to Retained Earnings.
d. Be a deduction from the investment in associate account.
7. Under IFRS 9, the cumulative balance of equity as a result of measuring equity

investments at fair value through OCI.
a. Shall not be reversed to P/L but may be transferred to another equity account
b. Shall not be reversed to P/L and shall be transferred to another equity account
c. Shall be reversed to P/L at the date the security is sold
d. Shall be reversed to P/L when there is objective evidence of impairment.
8. Non-trading equity instrument shall be classified as

a. At fair value through profit or loss
b. At fair value through other comprehensive income
c. Based on irrevocable choice at date of initial recognition either at fair value through
P/L or at fair value through OCI
d. Based on irrevocable choice at the reporting date either at fair value through P/L or at
fair value through OCI

2nd Sem A.Y.2020-2021
9. According to IAS 28, which of the following will not fall under the situation of "existence of
significant influence by an investor in the financial and operating policy decisions of the
investee but not control of these decisions."
a. Technological dependencies
b. Material intercompany transactions
c. Participation in the policy making decisions
d. Power to govern the financial and operating policy decisions of an enterprise so as to
obtain benefits from its activities.
10. An investor uses the equity method to account for its 30% investment in ordinary shares
of an investee. Amortization of the investor's share of the excess of market value over
book value of depreciable assets at the date of the purchase should be reported in the
investor's statement of comprehensive income as part of
a. Share in the profit of investee
b. Other Expense
c. Depreciation Expense
d. Amortization of Goodwill
11. Pacman Company purchased 1,000 shares of RJ Company ordinary shares at

P540/share. Pacman also paid broker's commission of P10,000 in relation to the said
investment. The securities are designated as at fair value through profit or loss. At the
end of 2019, the securities had total market value of P565,000. At December 31, 2020
the total market value of the equity securities is P 590,000. The holding gain or loss that
would be reported by Pacman on its income statement for the year 2020 is
_________________.
12. On December 01, 2020, Matiyaga Company purchased 1,000 shares of Masipag Corp.
P100 par ordinary shares (5% interest in voting rights) at P175 per share. Matiyaga also
paid transaction cost of P3,500. The shares were designated as equity investments at
fair value through other comprehensive income. On December 31, 2020, Masipag
ordinary shares were quoted at P200 per share. What is the carrying value of the equity
investment of Matiyaga at December 31, 2019? ______________
13. On September 11, 2020, Ali Company purchased for P7,000,000 the assets and will
assumed all the liabilities of Iris Corporation. As of this date, the book value and fair
market value of Iris assets are P10,000,000 and P11,500,000 respectively. Iris has current
liabilities of P2,000,000 and noncurrent liabilities of P3,250,000 respectively. How much
goodwill is to be recorded by Ali? ____________
Using the information 14 – 15:
LA SCALA Corporation had the following equity investments transactions:
Date Reference Particulars
2019 Buy invoice 10,000 Gerphil Corporation at P5 per share. Transaction cost P500.
Dec. 2 123 Designated as Equity Investment at Fair Value through Profit or Loss.
Dec. 3 Sell invoice 10,000 Gerphil Corporation at P7 per share. Transaction cost P700.
456
Dec. 6 Buy invoice 1,000 Gaudioso Corporation at P50 per share. Transaction cost
135 P500. Designated as Equity Investment at Fair Value Through Other
Comprehensive Income.

2nd Sem A.Y.2020-2021
Dec. 18 Buy invoice 20,000 Gerphil Corporation at P6 per share. Transaction cost
156 P1,400. Designated as Equity Investment at Fair Value through
Profit or Loss.
Dec. 26 CM 1000 P500 Cash Dividend from Gaudioso Corporation.
Dec. 31 PSE Report Closing prices per share: Gerphil P7; Gaudioso P48; La Scala
P100
14. Which amounts should LA SCALA Corporation report in its December 31, 2019 Statement
of Financial Position?
Equity Investment at Equity Investment at Other Comprehensive
Fair Value through Fair Value through Income – Unrealized
Profit and Loss Other Comprehensive Gain/Loss from equity
Income investment at OCI
a. P140,000 P50,500 P2,500 credit
b. P140,000 P48,000 P2,500 debit
c. P70,700 P49,400 none
d. P120,000 P100,000 P1,400
15. What is the journal entry to recognize P500 dividend received by LA SCALA from
Gaudioso?
Using the information 16 – 17:

Holiday, Inc. had the following transactions in the ordinary shares of May Corp., which has
1,000,000,000 ordinary shares outstanding.
January 5 Bought 4,000 ordinary shares, P100 par, at P88.
June 15 Received 10% bonus issue.
August 31 Received P4 cash dividend for each ordinary share.
16. How much is the revised cost per share after receipt of bonus issue? ___________
17. Based on the foregoing, what is the journal entry to recognize the receipt of cash dividend?
18. Charmaine Company provided the following data pertaining to dividends on ordinary share
investments for the current year:
➢ On October 01, the entity received P600,000 liquidating dividend from A Company. The
entity owned a 10% interest in A Company.
➢ The entity owned a 20% interest in B Company which declared and paid a P4,000,000
cash dividend to shareholders on December 31.
➢ On December 01, the entity received from C Company a dividend in kind of one share of
D Company for every 4 C Company shares held. The entity had 100,000 C Company
shares which have a market price of P50 per share on December 01. The market price of
D Company share was P10.
How much is the dividend income to be recognize for the year? __________________
19. Therese Company issued rights to subscribe to its stock, the ownership of 4 shares
entitling the shareholders to subscribe for 1 share at P100. An investor owned 50,000
shares with total cost of P5,000,000. The share is quoted right-on at P125. The stock
rights are accounted for separately and measured initially at fair value. What is the cost of
the new investment assuming all of the stock rights are exercised by the investor?

2nd Sem A.Y.2020-2021
20. On July 01, 2020, Jennifer Company acquired 20% of the outstanding ordinary shares of
another entity for P5,000,000. The carrying value of the acquired assets was P4,000,000.
The excess of cost over the carrying amount was attributable to an identifiable intangible
asset which was undervalued on the investee’s statement of financial position and which
had a remaining useful life of 5 years. For the year ended December 31, 2020, the investee
reported net income of P6,000,000 and paid cash dividends of P1,000,000 on ordinary
shares capital and issued 10% stock dividend on December 31, 2020. What is the carrying
value of the investment in associate on December 31, 2020? __________________

2nd Sem A.Y.2020-2021
Module 5
INVESTMENT IN DEBT SECURITIES
Overview
A debt security is a kind of financial asset that is formed when one party lends money to
another. For example, bonds are debt securities issued by corporations and sold to investors.
Investors lend money to corporations in return for interest payments, along with the return of their
principal upon its maturity date. This module will discuss the accounting treatments for investment
in debt securities in line with the provisions of IFRS 9.
Module Objectives
❖ understand the nature of investment in debt securities;
❖ classify investments in debt securities in accordance with IFRS 9;
❖ measure investments in debt securities at the date of initial recognition and at reporting
date;
❖ formulate entries for transactions affecting investment in debt securities subsequent to
initial recognition;
❖ identify the required disclosures for investment in debt securities.
Course Material
NATURE OF INVESTMENT IN DEBT SECURITIES

Investment in debt securities represents the creditor’s claim with a fixed amount and
usually some interest obligation. The most common example of debt securities are bonds. The
contract between the issuing corporation and the bondholder (also known as the investor) is
known as bond indenture. The bond indenture specifies the rights and duties of both parties,
terms of the bonds, restriction on the issuing corporation and all other important details affecting
the contracting parties. Bonds that mature in a single date is known as term bonds while the bonds
that mature in installment is called serial bonds. Debt securities normally have the following
characteristics:
1. maturity value
2. maturity date
3. periodic interest payments based on stated rate
Types of Interest Rates

1. Stated rate or nominal rate- is the interest rate indicated in the face of the bonds. It is
the basis of the interest received/receivable or paid/payable.
2. Effective interest rate or market rate or yield rate- is the rate that exactly discounts
estimated future cash payments or receipts through the expected life of the financial asset
or financial liability to the gross carrying amount of a financial asset or to the amortized
cost of a financial liability. It is the basis of the interest earned/incurred during a period.
The value of the bonds can be based on market quotation or the discounted value. Any
quotation for the debt security is expressed as a percentage of its face value. Thus, if P1,000,000
bond is quoted at 98, its bond price is P980,000; if P1,000,000 bond is quoted at 103, its bond
price is P1,030,000. If the quotation or purchase price is not available, the bond price or market
price is determined by discounting the maturity value of the bond and each remaining interest
payments at the market rate of interest for similar debt on that date. When computing the present
value, the interest rates are considered.

2nd Sem A.Y.2020-2021
➢ Stated rate = Effective rate → Bonds sell at face value
➢ Stated rate > Effective rate → Bonds sell at a premium
➢ Stated rate < Effective rate → Bonds sell at a discount
Accrued interest arises in the accounts when debt securities are purchased at any time
between the interest dates. This amount is excluded in the cost of the debt investment and is
recorded separately in an interest receivable or interest revenue account. Meanwhile, this will be
part of the cash paid at initial recognition.
Designation of Debt Instrument

An entity shall classify financial assets as subsequent measured at amortized cost, fair
value through profit or loss, or fair value through other comprehensive income based on both:
• the entity business model for managing the financial assets; and
• the contractual cash flow characteristics of the financial assets.
1. Amortized Cost (if both of the following condition are met)

• The financial assets are held within a business model whose objective is to hold financial
asset to collect; and
• The contractual terms of the financial asset give rise on specified dates to cash flow that
are solely payments of principal and interest (SPPI) on the principal amount outstanding.
2. Fair value through other comprehensive income (if both of the following conditions are met)
• The financial assets are held within a business model whose objective is achieved by both
collecting contractual cash flow and selling financial assets; and
• The contractual terms of the financial asset give rise on specified dates to cash flow that
are solely payments of principal and interest on the principal amount outstanding
3. Fair value through profit or loss. Financial asset shall be measured at fair value through
profit or loss unless it is measured at amortized cost or at fair value through other comprehensive
income.
DEBT INVESTMENT AT AMORTIZED COST

Debt investment at amortized cost is initially recognized at purchase price which is the fair
value at the date of acquisition plus transaction costs that are directly attributable to their
acquisition. After the initial recognition, at interest dates and at reporting dates, any premium or
discount is amortized using the effective interest method. Any fair value at the end of the reporting
period is to be ignored. If the debt securities are disposed, amortization should be recorded until
the date of sale to update the carrying value of the investment sold. Gain or loss is recognized for
the difference between the sales price and the updated carrying amount of the debt investment
on the date of sale.
Below are the pro-forma entries related to the transactions of debt investments at
amortized cost:
1. Date of purchase (purchase price plus transaction cost):
Debt investment – Amortized cost XX
Cash XX
2. Amortization of discount or premium and collection of interest:

a. Debt investments with discount
Cash XX
Interest revenue XX

2nd Sem A.Y.2020-2021
b. Debt investments with premium
Cash XX
Interest revenue XX
3. Change of fair values:

No entry
4. Disposal (after the update of the carrying value)

a. If the selling price is higher than the carrying value
Cash XX
Gain on sale of debt investment XX
b. If the selling price is lower than the carrying value

Cash XX
Loss on sale of debt investment XX
Summary
Transaction cost Capitalized
Amortization Nominal - Effective
Amortized cost at the beginning of the period
Interest income
x effective rate
Carrying value at Balance Sheet date Amortized cost
Unrealized Gain/Loss or Accumulated OCI None
Cumulative Unrealized Gain or Loss None
Gain or Loss on Sale Profit or loss
DEBT INVESTMENT AT FAIR VALUE THROUGH PROFIT OR LOSS

Debt investment at fair value through profit or loss (FVPL) is initially recorded at cost
(purchase price which is generally its fair market value at the date of acquisition). Any transaction
cost directly attributable to its acquisition does not form part of the cost of investment and is
recorded as an expense. The discount or premium on investments classified as debt securities at
fair value through profit or loss is not subject to amortization. At the reporting date, the debt
investments are measured at fair value and the unrealized gains and losses are taken to profit or
loss.
If the investment is disposed, there is no need to update the carrying value. Thus, the gain
or loss is recognized for the difference between the sales price and the most recent measurement
at the reporting date.
Below are the pro-forma entries related to the transactions of debt investments at fair value
through profit or loss:
1. Date of purchase:
Debt investment – FVPL (purchase price) XX
Expense (any transaction cost) XX
Cash XX

2nd Sem A.Y.2020-2021
No entry for the discount or premium
Cash XX
Interest revenue (face value x nominal rate) XX

a. If the fair value at the end of the reporting period is higher than the cost/carrying of the
previous period.
Debt investment – FVPL XX
Unrealized gains or loss- FVPL XX
b. If the fair value at the end of the reporting period is lower than the cost/carrying of the
previous period.
Unrealized gains or loss- FVPL XX
4. Disposal
a. If the selling price is higher than the most recent fair value
Cash XX
Gain on sale of debt investment XX
b. If the selling price is lower than the most recent fair value
Cash XX
Loss on sale of debt investment XX
Summary
Transaction cost Expense
Amortization None
Interest income Face value x Nominal Rate
Carrying value at Balance Sheet date Fair value
Unrealized Gain/ Loss due to change in Fair value Profit or Loss
Cumulative UG/UL or Accumulated OCI None
Gain or Loss on Sale Profit or Loss
DEBT INVESTMENT AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME

Debt investment at fair value through other comprehensive income (FVOCI) is initially
recognized at purchase price which is the fair value at the date of acquisition plus transaction
costs that are directly attributable to their acquisition. After the initial recognition, at interest dates
and at reporting dates, any premium or discount is amortized using the effective interest method.
At the reporting date, the debt investments are measured at fair value. The difference between
the amortized cost and the fair value of debt investment is taken to equity (in the statement of

2nd Sem A.Y.2020-2021
financial position) under other comprehensive income while the change in the balance of
Unrealized Gains/Losses account shall be presented in the statement of comprehensive income.
If the debt securities are disposed, the fair value at the date of sale should be adjusted.
Moreover, the cumulative balance of the unrealized gain/loss account is transferred to profit or
loss. When the sale takes place between interest dates, accrued interest is recorded as Interest
Revenue. The gain or loss on sale is computed based on the sales price less the carrying value
at the date of sale (which is coming from the amortized cost).
Below are the pro-forma entries related to the transactions of debt investments at fair value
through other comprehensive income:
1. Date of purchase (purchase price plus transaction cost):
Debt investment – FVOCI (purchase price) XX
Cash XX

a. Debt investments with discount
Debt investment – FVOCI XX
Cash XX
Interest revenue XX
b. Debt investments with premium

Cash XX
Interest revenue XX

a. If the fair value at the end of the reporting period is higher than the amortized cost.
Fair Value adjustments- Debt Investments XX
Unrealized gains or loss- FVOCI XX
b. If the fair value at the end of the reporting period is lower than the cost/carrying of the
previous period.
The Fair Value Adjustments-Debt Investments is a real account and shall be presented as an
adjunct account (if debit) or valuation account (if credit) to the Debt Investments at Fair Value
through Other Comprehensive Income. On the other hand, the Unrealized Gain/Loss- FVOCI
cumulative balance shall be presented in the shareholders’ equity section of the statement of
financial position while the change in the balance of this account shall be presented in the
statement of comprehensive income as Other Comprehensive Income.
4. Disposal (after the update of fair value)

Cash XX

Gain on sale of debt investments XX

2nd Sem A.Y.2020-2021
Summary
Transaction cost Capitalized
Amortization Nominal - Effective
Interest income Amortized cost x Effective rate
Carrying value at Balance Sheet date Fair value
OCI reported in the Statement of
Unrealized Gain/ Loss due to change in Fair value
Comprehensive Income
OCI reported in Statement of Financial
Cumulative UG/UL or Accumulated OCI
Position
Gain or Loss on Sale Profit or Loss
RECLASSIFICATION OF DEBT INVESTMENTS

Reclassification shall be made when and only when an entity changes its business model
for managing its financial assets. Reclassification is prohibited (1) when there is change in
management intention; (2) upon temporary disappearance of a particular market; and (3) when
transfers of assets are made between existing models. Moreover, it shall be made prospectively
from the date of reclassification.
From Amortized Cost

In a reclassification from amortized cost to FVPL, the new debt investment (FVPL) is
recorded at fair value and the difference between fair value and amortized cost is taken to profit
or loss.
On the other hand, a transfer from amortized cost to FVOCI, the new debt investment
(FVOCI) is recorded at 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.
From Fair Value through Other Comprehensive Income

In a reclassification from FVOCI to FVPL, the new debt investment (FVPL) is recorded at
fair value and the cumulative unrealized gain/loss in OCI is transferred to profit or loss.
On the other hand, from FVOCI, the accumulated unrealized gain/loss and fair value
adjustment balance (amounts are the same), are eliminated in the accounts. The new debt
investment (at amortized cost) is recorded at the amount of the FVOCI, and the same effective
interest rate is used, as if it had been designated at amortized cost from the date of initial
recognition.
From Fair Value through Profit or Loss

In a reclassification from FVPL to FVOCI the new debt investment (FVOCI) is recorded at
fair value and an effective interest rate is calculated based on the fair value on the date of
reclassification.
On the other hand, from FVPL, the new debt investment (at amortized cost) is recorded
at fair value, that serves as the initial cost and an effective interest rate is calculated based on the
fair value on the date of reclassification.

2nd Sem A.Y.2020-2021
1. What are the characteristics of a bond investment?
2. Based on IFRS 9, what are the classifications of investment in debt securities? Explain.
3. What is the business model and cash flow characteristics of a bond investment for it to be
classified as financial asset at amortized cost?
4. What is the initial measurement of investment in debt securities?
5. What is the difference between bond premium and bond discount?
6. What is the effect of amortizing bond premium and bond discount on interest income?
7. Why is there a need to amortize discount or premium?
8. What are convertible bonds?
9. Based on IFRS 9, how do we reclassify bond investment at fair value to amortized cost?
10. Based on IFRS 9, how do we reclassify bond investment at amortized cost to fair value?
PROBLEMS
Problem 1
Jungkook Company acquired P2,000,000 bonds on May 1, 2020 and its accountant correctly
prepared the following entry:
Investment in Debt Securities at Amortized Cost 2,294,416
Cash 2,294,416
These bonds pay interest at a rate of 8% per annum every April 30 and will mature after 10 years.
Market rate of interest for the same bonds was 6%.
Based on the foregoing, determine the following:

1. Premium amortization for the year 2020.
2. The interest income to be presented in the 2022 Statement of Comprehensive
Income.
Problem 2
Taehyung, Inc. purchased a bond investment in 2020 and was classified the same as investment
at amortized cost. Portion of the amortization table was presented below:
NOMINAL EFFECTIVE CARRYING
DATE AMORTIZATION
INTEREST INTEREST VALUE
5/1/26 P160,000 P128,317 P31,683 P2,106,939
5/1/27 160,000 126,416 33,584 2,073,356
5/1/28 160,000 124,401 35,599 2,037,757
5/1/29 160,000 122,243 37,757 2,000,000
On November 30, 2028, Taehyung sold the investments at 102 plus accrued interest.
Determine the gain or loss on sale of investment
Problem 3
On January 1, 2020, Jimin Co. purchased debt securities which carry a 10% fixed interest for
P765,540 to be held as financial assets at amortized cost. The securities have face value of
P600,000, and interests are receivable semi-annually every June 30 and December 31. The
prevailing market interest rate of debt securities of this type is 7%.

2nd Sem A.Y.2020-2021
On October 31, 2021, Jimin Co. sold 40% of the securities including any accrued interest for a
gain of P 5,250.

1. The carrying value of the bond investment on December 31, 2020.
2. Total amount received by Jimin Co. on the sale of 40% bond investment on October
31, 2021.
3. Interest income to be reported in the December 31, 2021 Statement of
Comprehensive Income.
4. Carrying value of the bond investment on December 31, 2021.
Problem 4
RM Company carried out the following transactions in bond investments held for trading during
the current year:
8/1 Purchased 5,000, P 1,000, 12% bonds of AAA Company at 104 plus
accrued interest. The bonds pay interest semi-annually on May 1 and
November 1.
8/31 Purchased 2,000, P 1,000, 12% bonds of BBB Company at 98 plus accrued
interest. Semi-annual payments of interest are on June 30 and December
31.
12/1 Sold 2,000 of the AAA bonds at 102 plus accrued interest. Brokerage fee
of P 160,000 was incurred.
12/31 AAA bonds were selling at 98. BBB bonds were selling at 99.

1. Gain (loss) on sale of AAA bonds.
2. Total interest income for the year.
3. Unrealized gain (loss) to be reported in the profit or loss section of statement of
comprehensive income for the year.
Problem 5
For P 3,691,500, Suga Company purchased a 5-year, 8% P 4,000,000 face value bonds of BTS
Company on June 1, 2020. The bonds were purchased to yield 10% and pay interest every June
1 and December 1.
The market value of the bonds on December 31, 2020, December 31, 2021 and December 31,
2022 were quoted at 97, 99, and 98, respectively.
If the investment in bonds were designated as Investment at fair value through profit or
loss, determine the following:
1. The 2020 interest income.
2. The unrealized gain to be reported in 2020 profit or loss section of the Statement
of comprehensive income.
3. The total amount to be reported in 2021 profit or loss section of the Statement of
comprehensive income

2nd Sem A.Y.2020-2021
Problem 6
On December 1, 2020, J-Hope Company purchased P 5,000,000, 15% face value bonds at 98.
The bonds mature on November 30, 2027 and pay interest semi-annually every May 31 and
November 30. Transaction costs incurred in relation to acquisition is 3% of the bonds face value.
J-Hope classified this investment as trading securities.
On November 30, 2023 after receiving the periodic interest, J-Hope sold the investment at 101.
The bonds were quoted in the market at 98, 99 102, 100, and 97 on December 31, 2020, 2021,
2022, 2023, and 2024, respectively.
Determine the gain or loss on sale of the investments.
Problem 7
On January 1, 2020, Euphoria Corporation purchased 3 – year, 10%, 5,000 of P1,000 face value
bonds for P4,600,000. In relation to this acquisition, Euphoria incurred P160,000 broker’s
commission. Euphoria intended to collect contractual cash flows and to sell the financial asset.
On June 30, 2022, Euphoria sold the bonds at 110 plus interest.
Meanwhile, Euphoria determined the following fair values at each year-end:

December 31, 2020 102
December 31, 2021 105
December 31, 2022 104
Using a 12% effective interest rate, determine the following:

1. Amount of unrealized gain to be reported as part as component of other
comprehensive income in the 2021 statement of comprehensive income
2. Gain on sale of the bond on June 30, 2022.
Problem 8
On December 31, 2018, Life Goes On Company purchased 5 – year, P500,000 face value bonds
at a premium of P43,300 and classified the same as investment at fair value through other
comprehensive income. The bond indenture stated that Life Goes On will receive interest of
P35,000 annually.
In 2020, Life Goes On’s accountant recorded premium amortization of the bond in the amount of
P 8,227. On December 31, 2021, Life Goes On sold 60% of the bonds for P300,450. Following
are the fair values of the bonds at each year-end:
DATE FAIR VALUE

12/31/19 P 535,500
12/31/20 P 537,500
12/31/21 P 500,750
12/31/22 P 210,060
12/31/23 P 250,130
Determine the following:
1. Carrying the value of the bond on December 31, 2020.
2. Amount of unrealized gain or loss to be presented in the December 31, 2020
statement of comprehensive income. (identify whether gain or loss)
3. Interest income in 2021.
4. Gain or loss on sale

2nd Sem A.Y.2020-2021
Module 6
FINANCIAL LIABILITIES
Overview
IAS 1 Presentation of Financial Statement defines “Liabilities”, as a present obligation of
an entity arising from past transactions or events, the settlement of which is expected to result in
an outflow from the entity of resources embodying economic benefits.
Module Objectives
❖ understand the nature of financial liabilities;
❖ define liabilities and explain their essential characteristics (IAS 1);
❖ explain the nature of accounts payable, notes payable and bonds payable;
❖ describe the initial recognition of financial liabilities based on IFRS 9;
❖ describe the transactions subsequent to initial recognition of accounts payable, notes
payable and bonds payable;
❖ identify the process of settlement of financial liabilities; and
❖ present financial liabilities and relevant information in the financial statements.
Course Materials:
Essential Characteristics of a Liabilities

1. Present obligation – it may be legal obligation or constructive obligation
o Legal obligation – this is the one that derive from a contract, legislation, or other
operation of law. An obligation may be legally enforceable as a consequence of
binding contract or statutory requirement.
Example is with the accounts payable for goods and services received.
o Constructive obligation – give rise to liabilities by reason of normal business
practice, custom and a desire to maintain good business relations or act in an
equitable manner.
Example, an entity decides as a matter of policy to rectify faults in the products
even when these become apparent after the warranty period has expired.
2. Arises from past event – means that liability is recognized when incurred. The past event
that leads to a legal or constructive obligation is known as the obligating event.
Example, the acquisition of goods gives rise to accounts payable. The obligating event is
the acquisition of goods.
3. Outflow of future economic benefits – means that the liability must be to pay cash, transfer
noncash asset or provide service at some future time.
FINANCIAL LIABILITIES
Under IFRS, a financial liability can be either of the following items:
• A contractual obligation to pay cash to another entity or a potentially unfavorable exchange
of financial assets or financial liabilities with another entity.
• A contract probably to be settled in the entity’s own equity and that is a non-derivative
under which the entity may deliver a variable amount of its own equity instruments, or a
derivative that probably will be settled other than through the exchange of cash or similar
for a fixed amount of the entity’s equity.
However, rights, options and warrants issued by an entity on a pro-rata basis to existing
shareholders to issue own shares of capital are not financial liabilities but are equity.

2nd Sem A.Y.2020-2021
INITIAL RECOGNITION OF FINANCIAL LIABILITIES
Financial liabilities shall recognize in accounting when, and only when, an entity assumes
an obligation to deliver cash or another financial asset.
At initial recognition, an entity measures a financial liability at its fair value plus or minus,
in the case of a financial liability not at fair value through profit or loss, transaction costs that are
directly attributable to the acquisition or issue of the financial liability.
For financial liabilities that will be subsequently measured at amortized costs, initial
measurement will be the transaction price minus the cost incurred to received whatever is
considered as a result of incurring the liability.
ACCOUNTS PAYABLE
Accounts payable are trade liabilities arising from the purchase of goods or services that
are consumed or to be sold by the entity in the normal conduct of business.
Accounts payable is considered to be current when it is expected to be realized within one
year or in a normal operating cycle whichever is longer. And if there is no transaction cost,
accounts payable must be initially measured at the transaction price.
The liability for goods purchased must be recorded when the entity acquires from the seller
the significant risks and rewards of ownership of goods. In most cases, this coincides with the
transfer of the legal title or the acquisition of ownership. The transfer of title depends on the terms
of purchase (which could either be FOB shipping point or FOB destination). A purchase made
towards the end of the accounting period, where goods are still in transit, should be recognized
as a liability when the term of shipment is FOB shipping point. The cost of the goods, likewise, is
included in the ending inventory. The record of goods received (inclusion in ending inventory)
should be in agreement with the liability (recognition of accounts payable). Both the liability and
the inventory should be reflected in the financial statements of the proper reporting period.
Illustration:
The balance in Copper Company’s accounts payable account at December 31, 2020 was
1,550,000 before any year-end adjustments relating to the following:
• Goods were in transit from a vendor to Copper on December 31, 2020. The invoice cost
was P70,000 and the goods were shipped FOB shipping point on December 28, 2020.
The goods were received on January 5, 2021.
• Goods shipped FOB shipping point on December 15, 2020 from a vendor to Copper, were
lost in transit. The invoice cost was P43,500. On January 3, 2021, Copper filed a P43,500
claims against the common carrier.
• Goods shipped FOB destination on December 24, 2020, from a vendor to Copper, were
received on January 7, 2021. The invoice cost was P16,500.
What amount should Copper report as accounts payable on its December 31, 2020 statement of
financial position?
Solution:
Accounts Payable – Unadjusted balance 1,550,000
Goods in transit 70,000
Goods lost in transit (FOB Shipping Point) 43,500
Accounts Payable – Adjusted balance 1,663,500
• For goods shipped FOB shipping point – title to the goods passes from seller to the buyer
at the point of shipment or point of delivery while goods shipped FOB destination – title to
the goods passes to the buyer upon receipt of the goods.

2nd Sem A.Y.2020-2021
• The goods shipped FOB shipping point on December 15, 2020 but lost in transit does not
take the liability of Copper Company to the seller.
Methods of Accounting for Accounts Payable:

A. Gross Method
o Accounts payable is recorded without deducting cash discount offered.
o Cash discount is recorded as deduction from cost/expense when taken.
o Yearend adjustment is made for accounts settled in subsequent period within the
discount period
B. Net Method
o Accounts payable is recorded net of cash discount
o Cash discount is recorded as “Purchase Discount Lost” and reported as a Finance
cost, when it is not taken
o Yearend adjustment is made for accounts whose discount period already lapsed
Illustration:
Assume GCQ Company purchased from MECQ Company with an invoice price of P100,000; term
FOB Shipping point, 2/10; n/30. GCQ Company uses periodic inventory system. Entries in the
books of GCQ Company to record the purchase and payment under the gross and net method
are:
Under Net Method, if payment is not made yet at the reporting date and the discount
period has already lapsed, an adjusting entry is needed to record as follows:
Purchase Discount Lost 2,000
Accounts Payable 2,000
This adjusting entry brings the accounts payable balance to P100,000. The adjustment is
made to reflect in the accounts the accurate amount of the resources expected to be given upon
settlement of the obligation in the subsequent period.
Under Gross Method, year-end adjustment is necessary if the account has not yet been
paid at year-end but subsequently settled during the subsequent reporting period within the
discount period. The adjustment is not necessarily made at year-end but is dated at the end of
the year. Adjusting entry is:
Allowance for Purchase Discount XX
Purchase Discount XX

2nd Sem A.Y.2020-2021
The entry reduces the amortized cost of accounts payable to the amount of cash that would be
disbursed to settle the account in the subsequent period. The adjustment also matches properly
the purchase discounts against the recorded purchases in the same reporting period. The account
“Allowance for Purchase Discount” is deducted from Accounts Payable in the statement of
financial position, while the Purchase Discount account reduces the recorded cost of Purchases
that is shown in the statement of comprehensive income. On the first day of the subsequent
reporting period, such adjustment is reversed, so that the payment of account is made in the usual
manner, as follows:
Accounts Payable XX
Purchase Discounts XX
Cash XX
NOTES PAYABLE
Notes Payable are written promises to pay a certain sum of money on a specified future
date. They may arise from purchases, financing, or other transactions. Some industries require
notes as part of the sales/purchases transaction in lieu of the normal extension of open account
credit, this is referred to as trade notes payable. Notes payable to banks or loan companies
generally arise from cash loans and these are classified as non-trade notes payable.
Companies classify notes as short-term or long-term, depending on the payment due date. Trade
notes payable is generally classified as current. Non-trade notes payable that are due and
payable within one year are treated as current. Whereas, if maturing beyond one year, it is
classified as noncurrent liability.
Notes may also be interest-bearing or non-interest-bearing. A non-interest-bearing note does not
explicitly state an interest rate on the face of the note. Interest is still charged, however.
Illustrations: Accounting for Interest-bearing notes payable
1. On July 1, 2020, Smart Company issued a 90-day, 10% notes for P200,000 to SMC Company
to settle its overdue account. (trade notes payable).
The entry by Smart Company to record the issuance of the notes is:
July 1- Accounts Payable 200,000
Notes Payable 200,000
The payment of the notes payable on September 29, its due date was recorded by Smart with
the following entry:
Sept. 29 Notes Payable 200,000
Interest Expense 5,000
Cash 205,000
How to compute for the amount of interest:

Face value of the note P200,000
Multiply by interest rate and term of the note/360 days X 10% X 90/360
Interest of the note for 90 days P5,000
How to determine the due date/maturity date of notes:

Term of the note 90 days
Number of days in July 31
Date of the note, July 1 30
Days in August 31
Due date of note, September 29
Total number of days 90 days

2nd Sem A.Y.2020-2021
2. Interest bearing notes issued for property acquired. (non-trade notes payable)
On January 1, 2020, Smart Company purchased a parcel of land with a cost of P1 million pesos.
A down payment of P400,000 was made and issued a promissory note for P600,000 bearing
interest of 10% per annum. The P600,000 is payable in four annual installment of P150,000 every
January 1.
Entries to record transactions relating to the notes up to year 2022, are as follows:
2020
Date
Jan. 1 Land 1,000,000
Cash 400,000
Notes Payable 600,000
Dec. 31 Interest Expense 60,000

Interest Payable 60,000
To record accrued interest of the notes
Payable for the period Jan. 1 to Dec. 31,
2020. (600,000 x 10% =P60,000).
2021
Jan. 1 Notes Payable 150,000
Cash 210,000
To record the first annual payment of
principal and interest.

To take up accrued interest of the
outstanding balance of the note from Jan.
1, 2021 to Dec. 31, 2021. ((450,000 x .10
=P45,000)
2022
Jan. 1 Notes payable 150,000
Interest payable 45,000
Cash 195,000
2nd annual payment.

Interest for year 2022 of the P300,000
outstanding balance of the notes payable.
Every December 31, adjusting entry must be prepared to take up the accrued interest on the
notes payable.

2nd Sem A.Y.2020-2021
3. Note issued for cash borrowed (wherein the interest is deducted in advance).
Illustration:
On November 1, 2020, Smart Company discounted its own note of P1,000,000 at 12% for one
year.
The entry of Smart on November 1, to record the note issued is:
Cash 880,000
Discount on notes payable 120,000
Notes Payable 1,000,000
Computation of proceeds:
Face value of notes payable P1,000,000
Less: Discount (P1,000,000 x 12% ) 120,000
Proceeds P880,000
The discount on notes payable of P120,000 is the interest for one year deducted in advance.
On December 31, adjusting entry to amortize the discount must be prepared. The
amortization is for the period November 1 to December 31 (2 months). The entry to amortize
the discount on Dec. 31, 2020 is:
(P120,000 x 2 mos./12 )
On November 1, 2020, the carrying value of the notes payable is P880,000. That is;
Face value of the note P1,000,000
Less: unamortized discount 120,000
Carrying value P880,000
On December 31, 2020, the carrying value of the above notes payable is P900,000. That is;
Face value of the note P1,000,000
Less: unamortized discount(P120,000-20,000) 100,000
Carrying value of note P900,000
On the due date of the note, which is on October 31, 2021, The entries to amortized the
unamortized discount of P100,000 and the payment of the note are as follows:

cash 1,000,000
Accounting for noninterest-bearing notes payable

A noninterest-bearing notes payable does not explicitly state an interest rate on the face of
the note. It does not mean, however, that there is no interest imputed on the note. A noninterest-
bearing note is simply written in a form where the interest is imputed on the face value of the note.
Thus, the face value represents the present value of the note plus the imputed interest. The imputed
interest is based on the sound philosophy that no lender would part away with his money or property
interest-free.

2nd Sem A.Y.2020-2021
Non-interest bearing note issued for property
When a noninterest-bearing note is issued for property, the property is recorded at the cash
price of the property. The cash price is assumed to be the present value of the note issued. The
difference between the cash price and the face value of the note issued represents the imputed interest.
Illustrations:
1. On January 1, 2020, SOMO company acquired an equipment with a cash price of P350,000 for
P500,000. SOMO Paid down payment of P100,000 and issued a noninterest-bearing notes
payable for P400,000, payable in 4 equal annual installment of P100,000 every December 31.
The difference between P500,000 and the cash price of P350,000 represents the imputed
interest which is debited to the account discount on notes payable. The discount on notes
payable is periodically amortize by charging it to the account interest expense.
Using the amortization table below, the entries to record the above transaction for year 2020-
2023, are as follows:
2020
Jan. 1 Equipment 350,000
Cash 100,000
Notes payable 400,000
Dec. 31 Notes Payable 100,000

Cash 100,000
Paid first annual installment.
31 Interest Expense 60,000

Amortization of discount on notes
payable for year 2020
2021
Cash 100,000
Paid second annual installment.

Amortization of discount for
2021.
2022
Cash 100,000
3rd annual payment

Amortization of discount for
2022.

2nd Sem A.Y.2020-2021
2023
Cash 100,000
Last payment of notes payable

Last amortization of discount.
Table of Amortization
year Notes Payable fraction Amortization
Outstanding balance Of discount
2020 400,000 4/10 60,000
2021 300,000 3/10 45,000
2022 200,000 2/10 30,000
2023 100,000 1/10 15,000
1,000,000 150,000
2. Non-interest bearing note issued for property ( the cash price of the asset acquired is not
known).
On January 1, 2020, SOMO Company acquired an equipment for P1,000,000. The company
issued a noninterest-bearing note for P1,000,000 payable in 5 equal annual payment of
P200,000, every December 31. Assuming that the prevailing interest rate is 10%, the present
value of an ordinary annuity o 1 for 5 year at 10% is 3.7908. The cost of the equipment is equal
to the present value of the notes payable issued, computed as follows:
Annual installment P200,000

Multiplied by the present value factor 3.7908
Present value of the P1 M notes payable P758,160
Face value of the notes payable P1,000,000

Present value of notes payable 758,160
Discount on notes payable P241,840
The journal entries for year 2020, are:

Jan. 1 Equipment 758,160
Dec.31 Notes payable 200,000

Cash 200,000
First installment payment.
Dec.31 Interest Expense 75,816

Amortization for year 2020.

2nd Sem A.Y.2020-2021
Table of Amortization
Date Payment Interest Principal Present value
Jan. 1, 2020 758,160
Dec. 31,2020 200,000 75,816 124,184 633,976
Dec. 31,2021 200,000 63,398 136,602 497,374
Dec. 31,2022 200,000 49,737 150,263 347,111
Dec. 31,2023 200,000 34,711 165,289 181,822
Dec. 31,2024 200,000 18,178 181,822 -
Interest is equal to the preceding present value multiplied by the implied interest rate. Thus,
for year 2020, P758,160 x 10% equals P75,816.
Principal is the periodic payment after deducting the interest. Thus, for year 2020, P200,000 –
P75,816 = P124,184.
Present value is the balance of the preceding present value after deducting the portion of
payment applied to principal. Thus, for year 2020, P758,160-P124,184=P633,976.
3. Noninterest-bearing notes payable issued for property acquired. (the note is payable in
lump-sum)
On January 1, 2020, Tiktok Company acquired Land for P1,000,000. Tiktok paid a down payment
if P100,000 and signed a promissory note for P900,000 which is due after three year on January
1, 2023. There was no established cash price for the equipment. The prevailing interest rate for
this type of note is 10%. The present value of 1 for 3 periods is .7513.
Computations:
1. Present value of the notes payable
Lump sum payment P900,000
Multiplied by present value factor .7513
Present value of the P900,000 notes P676,170
payable
2. Cost of land
Down payment P100,000
Add: Present value of the notes payable 676,170
Cost of Land P776,170
3. Discount on notes payable

Face value of the note payable P900,000
Less: Present value of the note 676,170
Discount on notes payable P223,830
Table of Discount Amortization

Discount Balance of Present value of
Date amortization discount notes payable
Jan. 1, 2020 223,830 676,170
Dec. 31, 2020 67,617 156,213 743,787
Dec. 31, 2021 74,379 81,834 818,166
Dec. 31, 2022 81,834 - 900,000

2nd Sem A.Y.2020-2021
The present value of the notes payable is equals to face value minus the unamortized discount.
Thus, on December 31, 2020, the present value or carrying value of the notes payable of
P743,787 is P 900,000 minus P156,213. On December 31, 2021, P900,000 minus P81,834
equals P818,166.
The entries relating to the above notes payable are:

2020
Jan. 1 Land 776,170
Cash 100,000
Dec. 31 Interest expense 67,617

Discount amortization for
2020.
The discount on notes payable is amortized using the effective interest method, computed by
multiplying the preceding present value by the assumed interest rate. At maturity date of note,
its face value and present value are equal.
The entry to record the payment of the note on January 1, 2023, its due date would be:
Jan. 1, Notes Payable 900,000
2023
cash 900,000
A noninterest-bearing note may also be issued for money borrowed from a bank or a financing
company. The present value of such note is equal to the proceeds received. The difference
between the face value of the note and the proceeds received is the interest which is debited to
the account discount on notes payable.
Illustration: On April 1, 2020, Covie Company discounted its own one-year P150,000,
noninterest-bearing note with Metrobank at a discount rate of 10%. Covie will receive proceeds
of P135,000 from this loan. That is, P150,000 less P15,000 discount (10% of P150,000).
On issue date, April 1, 2020, the carrying value of the notes payable is P135,000. That is,
Face value of notes payable P150,000
Less: unamortized discount 15,000
On December 31, 2020, the carrying value of the note is:

Face value of notes payable P150,000
Less: unamortized discount (P15,000-11,250) 3,750
The entries relating to the above transaction are as follows:

2020
April 1 Cash 135,000
Obtained loan from Metrobank.

2nd Sem A.Y.2020-2021
(15,000x9/12)
Amortization of discount from Apr. to
Dec.
2021 150,000
Mar. 31 Notes payable
Cash 150,000
Payment of notes payable.
Mar. 31 Interest Expense 3,750

(15,000x3/12)
Amortization of the remaining
discount.
Interest bearing notes payable is presented in the statement of financial position at face value.
Whereas noninterest-bearing notes payable is presented at present value.
BONDS PAYABLE
A bond is a certificate of indebtedness whereby the borrower agrees to pay a sum of
money at a specified future date plus periodic interest payments at the stated rate. They are
commonly issued in denominations of P1,000, P5,000, or P10,000, referred to as face value or
par value. A corporation may sell all of its bonds to an investment firm or underwriter, which
resell the bonds to the investing public. Bonds may also be sold directly to the investor.
The contract between the issuing corporation and the bondholder is known as bond
indenture. The bond indenture specifies the terms of the bonds, rights and duties of both
parties, restrictions and all other important details affecting the contracting parties.
Types of bonds:
Term bonds -bonds that mature on a single date.
Serial bonds -bonds that mature in installment.
Secured bonds -are those that provide security and protection to investor in the
form of specific assets of the issuer, such as real estate or other
collateral.
Unsecured bonds -or frequently called debentures, are not protected by the pledge
of any specific asset of the issuing corporation. The issue of
debenture bonds is generally based on the issuer’s favorable
credit rating.
Registered bonds -are bonds whose owner’s names are registered in the books of
the issuing corporation. When these bonds are sold, the transfer
agent cancels the original certificate surrendered by the seller and
a new certificate is issued and registered in the name of the new
bondholder.
Bearer bonds of -are not recorded in the name of the owner. Each bond is
coupon bonds accompanied by coupons representing periodic interest
payments, covering the life of the issue.

2nd Sem A.Y.2020-2021
Callable/redeemable -are those that give the issuing corporation the right to call or retire
bonds the bonds before maturity date, usually specified on the bond
indenture.
Convertible bonds -are those that give the bond holder the right to exchange their
bond holdings into a specified or predetermined number of the
issuing corporation’s shares of stock.
Zero-interest bonds -are issued at significantly lower than their face value. Total
interest on these bonds during their entire term is paid together
with the principal amount on maturity date.
Bond liabilities are initially recognized at their discounted value, which equals the net
proceeds from their issuance. The issue price is the market price of the bond. The rate of interest
stated on the face of the bond is the contract rate/stated rate or nominal rate of interest. This
interest rate generally depends on the financial condition and earnings of the issuing corporation.
The interest rate which investor are willing to accept at the time of the bond issue depends
upon some factor such as the market evaluation of the quality of the bond issue as evidenced by
the financial strength of the business, the firm’s earnings prospects and the particular provisions
of the bond issue. This rate is referred to as the market rate/yield rate, or effective interest rate.
The sale of bonds at face value implies that the bonds stated interest rate is in agreement
with the market interest rate. Whereas bonds issued above its face value indicates that the bond’s
stated interest rate is higher that the market rate. In this case, the bonds will be sold at a premium.
On the other hand, if the stated rate is lower than the market rate, the issue price would be lower
than its face value. That is, the bonds will be sold at a discount.
Bond prices are quoted in the market as a percentage of face value. For example, a bond
quoted at 97 means that the market price is 97% of face value. Thus, the bond is selling a
discount. A quotation of 105 means that the market price is 105% of the face value. Thus, the
bond is selling at a premium.
Bonds issue costs are expenditures incurred by the issuing company for legal fees, printing and
engraving of bond certificates, taxes, commissions, and other charges. These costs form part of
the initial carrying amount of the bond liability. The net proceeds from bond issue is reduced by
the incurrence of bond issue costs. The amount of bond premium or discount is the difference
between the face value of the bonds and the net proceeds. In effect, bond issue cost is being
offset to the bond premium/discount. The entry to record bond issue cost is:
If bond is sold at a premium:
Premium on bonds xxx
Cash xxx
If bond is sold at a discount:

Discount on bonds xxx
Cash xxx
ISSUANCE OF BONDS
Illustrations:
1. Bonds issued at face value (at par)-the stated interest rate and the effective rate are the same

2nd Sem A.Y.2020-2021
On January 1, 2020, Orange Company issued a 5-year, P2,000,000, 10% bonds at par. The
effective interest rate for similar bonds is 10%. Interest is payable semi-annually every January
1 and July 1. The entries for year 2020, to record transactions relating to the above bonds are:
2020
Jan. 1 Cash 2,000,000
Bonds Payable 2,000,000
July 1 Interest expense 100,000

Cash (2,000,000 x 10% x 6/12) 100,000
Paid semi-annual interest.
Dec.
31 Interest expense 100,000
Accrued interest July to
December.
2. Bonds issued at a premium (above par. The stated interest rate of 15% is higher that the 12%
effective rate)
On January 1, 2017, Orange Company issued a 5-year, P1,000,000, 15% bonds for
P1,110,401. The effective interest rate for similar bonds is 12%. Interest is payable semi-
annually every January 1 and July 1. The entries for year 2017 and 2018 to record transactions
relating to these bonds are:
2017
Jan. 1 Cash 1,110,401
Premium on bonds payable 110,401

Cash (2,000,000 x 10% x 6/12) 75,000
Paid semi-annual interest.
July 1 Premium on bonds payable 8,376

Interest expense 8,376
First amortization of bond
premium.

Accrued interest, July to
December.
Dec.31 Premium on bonds payable 8,878

2nd amortization of bond premium.
Below is the amortization table of the bond premium for the entire term of the bond using the
effective interest method.

2nd Sem A.Y.2020-2021
Schedule of Bond Premium Amortization
Effective-Interest Method—Semiannual Interest Payments
5-Year, 15% Bonds Sold to Yield 12%
(A) (B) (C) (D)

Date Nominal Effective interest Amortization Bond Carrying
interest CV x effective (A) – (B) Value
FV x stated rate Previous (D) –(C)
rate
01/01/17 1,110,401
07/01/17 75,000 66,624 8,376 1,102,025
12/31/17 75,000 66,122 8,878 1,093,147
07/01/18 75,000 65,589 9,411 1,083,736
12/31/18 75,000 65,024 9,976 1,073,760
07/01/19 75,000 64,426 10,574 1,063,186
12/31/19 75,000 63,791 11,209 1,051,977
07/01/20 75,000 63,199 11,881 1,040,096
12/31/20 75,000 62,406 12,594 1,027,502
07/01/21 75,000 61,650 13,350 1,014,152
12/31/21 75,000 60,848 14,152 1,000,000
It is to be noted, that premium amortization decreases both the carrying value of the bond
and the interest expense. On maturity date, after the premium amortization for the entire term of
the bond, its carrying value of the bond will be equal to its face value. Premium on bonds payable
is an addition to the bonds payable. On December 31, 2017, the above bonds were presented in
the statement of financial position as follows:
Noncurrent Liabilities:
Bonds Payable P1,000,000
Add: Unamortized premium (110,401 - 8,376) 102,025 P1,102,025
At maturity date, the entry to record the payment of the bonds would be as follows:
Bonds Payable 75,000
Cash 75,000
3. Bonds issued at a discount (below par, with bond issue costs incurred)
A 5year, 12%, bonds with a face value of P1,000,000 were sold for P917,039 on January 1, 2020.
The issuer incurred a bond issue costs of P20,000. The bonds pay interest every July 1 and
January 1. The yield on the net proceeds is computed at 15%. Below is the amortization table of
the bond discount using the effective interest method.
Bond Discount Amortization Table

Effective Interest Method
A B C D
Nominal Interest Effective Discount Bond
Date P1Mx6% Interest Amortization(B- Carrying
Previous D A) value(D+C)
x7.5%
01/01/20 897,039*
07/01/20 60,000 67,278 7,278 904,317

2nd Sem A.Y.2020-2021
12/31/20 60,000 67,824 7,824 912,141
01/01/21 60,000 68,410 8,410 920,551
12/31/21 60,000 69,041 9,041 929,592
01/01/22 60,000 69,719 9,719 939,311
12/31/22 60,000 70,448 10,448 949,759
01/01/23 60,000 71,232 11,232 960,991
12/31/23 60,000 72,074 12,074 973,065
01/01/24 60,000 72,980 12,980 986,045
12/31/24 60,000 73,957 13,955 1,000,000
• The carrying value of the bond on January 1, 2020 is computed as follows:

Issue price of bonds P917,039
Less: bond issue costs 20,000
Net proceeds (Carrying value of bonds, Jan. 1, 2020 P897,039
The difference between the face value of the bonds and the net proceeds is the discount on
bonds. That is,
Face value of bonds P1,000,000
Net proceeds 897,039
Discount on bonds P102,961
The journal entries for the year 2020 and 2021 relating to the above bonds are as follows:
2020
Jan. 1 Cash 917,039
Discount on bonds payable 82,961
Jan. 1 Discount on bonds payable 20,000

Cash 20,000
Bond issue costs incurred.

Cash 60,000
Paid semi-annual interest

First amortization of discount on bonds.
To take up accrued interest on bonds

2nd amortization of discount on bonds.
2021
Jan. 1 Interest Payable 60,000
Cash 60,000
Paid semi-annual interest of bonds.

2nd Sem A.Y.2020-2021
Cash 60,000
Paid semi-annual interest of bonds.

3rd amortization of discount.

To take up accrued interest on bonds.

To amortize discount on bonds.
If amortization of bond premium decreases both the bonds carrying value and interest
expense, the amortization of bond discount, increases both the bonds carrying value and interest
expense. Discount on bonds payable is a deduction from the bonds payable. On December 31,
2020, the above bonds will be presented in the statement of financial position as follows:
Noncurrent Liabilities:
Bonds Payable P1,000,000
Less: Unamortized discount (P102,961- 7,278) 95,683 904,317
The amortization of bond premium/discount may be on every interest payment date or at

the end of every year.
Bonds issued between interest payment dates

If bonds are issued between interest payment date, an accrued interest is involved. Normally,
the accrued interest is paid by the buyer or investor. Since the issuing corporation will pay the full
periodic interest on the bonds outstanding at interest date, the bondholder is usually required to
pay the interest that has accrued from the most previous interest date to the date of sale.
Illustration:
On April 1, 2020, a Corporation issued bonds with a face amount of P5,000,000 at
P5,228,000 plus accrued interest. The bonds are dated January 1, 2020, mature in 5 year and
pay 12% interest semiannually on January 1 and July 1.
Computation of proceeds:
Issue price P5,228,000
Add: Accrued interest (from Jan.1 to Apr.1, 2020)
(P5,000,000 x12% x 3/12) 150,000
Total cash received P5,378,000
The entry to record the issuance of the above bonds is:

Cash 5,378,000
Bonds payable 5,000,000
Premium on bonds payable 228,000

2nd Sem A.Y.2020-2021
The accrued interest on the date of sale for 3 months from January 1 to April 1, 2020 is paid by
the investor because on July 1, 2020, the investor will receive interest for 6 months, that is from
January 1 to July 1. On July 1, 2020, the journal entry to record the payment of semiannual
interest is as follows:
Cash 300,000
(P5,000,000 x 12% x 6/12 = P300,000)
Retirement of Bonds on maturity date

The issuing corporation may retire bonds at maturity date or before the maturity date. If bonds
are retired at maturity date, any premium or discount must have been completely amortized. The
amount paid to the bond holder equals the face value of the bonds. The retirement is recorded as
an ordinary payment of debt. No gain or loss is recognized upon retirement of bonds on maturity
date. Thus, the entry is:
Bonds Payable xx
Cash xx
Retirement of Bonds prior to maturity date

If bonds are retired before maturity date, the following procedures are to be followed:
a) The amortization of premium/discount must be updated to determine the carrying
value
of the bonds at the date of retirement.
b) Any accrued interest on the retired bonds from the most recent interest payment date
up to the date of retirement must be recorded and paid.
c) Determine the gain/ loss on the early retirement of bonds to be recognized.
Illustrations:
1. A 15%, P1,000,000 bonds were issued on January 1, 2017 for P1,110,401, a price that
provides a yields of 12%. Interest is payable semi-annually on June 30 and December 31. On
October 31, 2020, The P1,000,000 bonds were retired at 102 plus accrued interest.
On October 31, 2020, the issuer should update the interest and amortization of premium with the
following entry:
Interest Expense (1,000,000 x 15% x 4/12) 50,000
Interest from July 2020 to Oct. 31, 2020.
Premium on bonds payable (12,594* x 4/6) 8,396

Amortization from July 2020 to Oct. 31, 2020.
*Please refer to the premium amortization table in the previous illustration.
Computation of the carrying value of the bonds on the retirement date.

Carrying value of bonds on July 1, 2020 P1,040,096
Less: premium amortization (July 1, 2020 to Oct. 31, 2020) 8,396
Carrying value of bonds on the retirement date (Oct. 31, 2020) P1,031,700

2nd Sem A.Y.2020-2021
Computation of gain(loss) on the early retirement of bonds.
Retirement Price (P1,000,000 x 102%) P1,020,000
Carrying value of bonds on retirement date 1,031,700
Gain on retirement of bonds P11,700
If the retirement price is less than the carrying value of bonds retired, the difference is
gain. If the retirement price is more than the carrying value of bonds retired, the difference is loss.
Computation of total amount to be paid by the issuer of bonds.

Retirement Price P1,020,000
Add: Accrued interest from July 1, 2020 to Oct. 31, 2020
(P1,000,000 x 15% x 4/12) 50,000
Total cash to be paid on the early retirement of bonds P1,070,000
Entry to record the retirement of bonds:

Premium on bonds payable (unamortized balance) 31,700
Cash 1,070,000
Gain on early retirement of bonds 11,700
TROUBLED-DEBT RESTRUCTURING
Some debtors experience difficulties in meeting their maturing obligations. For this reason, the
creditor may grant concession to the debtor that it would not otherwise grant under normal
conditions. This is called troubled debt restructuring. An entity shall remove a financial liability
from its statement of financial position when it is extinguished.
Troubled debt restructuring may consist of the following:

a. Asset swap
b. Equity swap
c. Modification of terms
a. Asset swap is a settlement of debt by a transfer of non-cash assets like, real estate,
receivables or other assets. Asset swap may result to a gain or loss on the disposal of the
asset used as payment for the debt. A gain or loss is also computed for the difference between
the carrying value of the debt and the fair value of the asset swapped.
Illustration: (Asset swap)

BGC Corporation has outstanding loans payable of P1,000,000 to China Bank with accrued
interest of P100,000, that is due on December 31, 2020. Due to depressed economic conditions,
BGC would not be able to pay this obligation. China Bank agreed to accept from BGC, equipment
with a fair value of P1,000,000 in full settlement of the P1M principal and the P100,000 accrued
interest. The equipment cost P1,500,000 with accumulated depreciation of P300,000.
Computation of gain or loss on the disposal of asset:

Cost of equipment transferred P1,500,000
Less: accumulated depreciation 300,000
Carrying value of equipment P1,200,000
Fair market value of equipment 1,000,000
Loss on disposal of land P200,000

2nd Sem A.Y.2020-2021
If the carrying value of asset disposed is more than its fair market value, the difference is loss.
Whereas, if the market value of asset disposed is more than its carrying value, the difference is
gain.
Computation of gain or loss on debt restructuring:

Amount of Loans payable P1,000,000
Add: Accrued interest 100,000
Carrying value of the liability P1,100,000
Fair market value of asset used as payment 1,000,000
Gain on debt restructuring P100,000
The entry to record the debt restructuring through asset swap is

Notes payable 1,000,000
Loss on disposal of land 200,000
Accumulated depreciation 300,000
Equipment 1,500,000
Gain on debt restructuring 100,000
b. Equity Swap- The debtor’s financial liability is extinguished by the issuance of the debtor’s share
capital or other equity instruments.
Illustration: (Equity Swap)

Coie Corporation has outstanding loans payable of P10,000,000 to Metrobank with accrued
interest of P1,200,000, that is due on December 31, 2020. Due to depressed economic
conditions, Coie would not be able to pay this obligation. Metrobank agreed to accept Coie’s
180,000 ordinary shares. Coie’s ordinary shares has par value of P50 and a fair market value of
P60.
Computation of gain or loss on debt restructuring:

Carrying value of debt settled (P10,000,000 + 1,200,000) P11,200,000
Fair market value of shares issued (180,000sh. X P60) 10,800,000
Gain on debt restructuring P400,000
Computation of additional paid-in capital on shares issued:

Fair market value of shares issued (180,000sh. X P60) P10,800,000
Par value of shares issued (180,000 sh. X P50) 9,000,000
Additional paid-in capital P1,800,000
The entry to record equity swap is:

Notes payable 10,000,000
Interest payable 1,200,000
Ordinary share capital 9,000,000
Additional paid-in capital 1,800,000
Gain on debt restructuring 400,000
c. Modification of terms-debt restructuring under modification of terms may take the form of one or
any combination of the following:
a. Reduction of stated interest rate
b. Reduction of the face amount of the debt
c. Reduction or condonation of accrued interest

2nd Sem A.Y.2020-2021
d. Extension of the maturity date
e. Moratorium on the payment of interest and/or principal
Illustration: (Modification of terms)

Cove Corporation has outstanding loans payable of P10,000,000 to Metrobank with accrued
interest of P1,200,000, that is due on December 31, 2020. Due to depressed economic
conditions, Cove would not be able to pay this obligation. Metrobank agreed to the following
modifications on December 31, 2020.
* Reduction of principal from P10,000,000 to P7,000,000
* Condonation of accrued interest
* Extension of maturity date to December 31, 2022, and
* Reduction of interest rate from 12% to 8%
The gain or loss on debt restructuring is computed as follows:

Discounted amount of the total future payments under the new terms:
Present value of the new principal amount (P7M x 0.63552) P4,448,640
Present value of the interest payments (P7M x 8%) x 3.03735 1,700,916
Total present value of future payments P6,149,556
Carrying value of the debt restructured (P10M + 1,200,000) 11,200,000
Gain on debt restructuring P5,050,444
The total discounted present value of future cash payments under the new terms is determined
using the original effective interest rate.
The entry to record the debt restructuring under modification of terms is:
Interest Payable 1,200,000
Restructured notes payable 6,149,556
Gain on debt restructuring 5,050,444
PROBLEMS
1. On April 1, 2020, SAM Company issued a P9,000,000 noninterest-bearing note due on March
31, 2023 for a piece of land with a cash price of P6,949,800.
Required:
a. Determine the effective interest rate of the note
b. Prepare the discount amortization table over the term of the note
c. Prepare the entries for year 2020 through 2023, including any year-end adjustments.
2. Shopee Company was authorized to issue a 5-year, 10%, P5,000,000 bonds dated June 30,
2020. Interest is payable semi-annually on June 30 and December 31. (The company uses the
effective interest method of amortization). Assuming the bonds were sold to yield:
a.) at 8% b.) at 12%
Required:
a. Determine the issue price of the bonds.

2nd Sem A.Y.2020-2021
b. Prepare the amortization table for the entire life of the bonds
c. Prepare the entries relating to the bonds for the year 2020 and 2021.
Multiple Choice-Theory
1. An entity shall measure initially a financial liability not designated at fair value through profit/loss
at
a. Fair Value
b. Fair value plus directly attributable transaction costs
c. Fair value minus directly attributable transaction costs
d. Face amount
2. Which of the following is not an essential characteristic for an item to be reported as a liability
on the balance sheet?
a. The liability is the present obligation of a particular enterprise
b. The liability arises from past transactions or events
c. The liability is payable to a specifically identified payee
d. The settlement of the liability requires an outflow of resources embodying economic
benefits
3. The covenants and other terms of the agreement between the issuer of bonds and the lender
are set forth in the
a. bond indenture b. bond debenture c. registered bond d. bond coupon
4. The rate of interest actually earned by bondholder is called the

a. stated rate only c. effective rate only
b. yield rate only d. effective, yield or market rate
5. Rich, Inc. issued bonds with a maturity amount of P200,000 and a maturity ten year from date
of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
6. Under the effective-interest method of bond discount or premium amortization, the periodic
interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
7. When the effective-interest method is used to amortize bond premium or discount, the periodic
amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.
8. If bonds are issued between interest dates, the entry on the books of the issuing corporation
could include a

2nd Sem A.Y.2020-2021
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.
9. When the interest payment dates of a bond are May 1 and November 1, and a bond issue is
sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.
10. The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be recorded as a reduction of the bond issue amount and then amortized over the life
of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.
11. The amortization of a premium on bonds payable

a. decreases the balance of the bonds payable account.
b. increases the amount of interest expense reported.
c. increases the carrying amount of the bond.
d. increases the cash payment to bondholder.
12. A debt instrument with no ready market is exchanged for property whose fair value is currently
indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed
interest rate.
b. it should not be recorded on the books of either party until the fair value of the property
becomes evident.
c. the board of director of the entity receiving the property should estimate a value for the
property that will serve as a basis for the transaction.
d. the director of both entities involved in the transaction should negotiate a value to be
assigned to the property.
13. When a note payable is issued for property, goods, or services, the present value of the note
may be measured by
a. the fair value of the property, goods, or services.
b. the fair value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. All of these answer choices are correct.
14. A discount on notes payable is charged to interest expense

a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective-interest method.
d. only in the year the note matures.
15. In a debt extinguishment in which the debt is continued with modified terms and the carrying
value of the debt is more than the fair value of the debt,

2nd Sem A.Y.2020-2021
a. a loss should be recognized by the debtor.
b. a new effective-interest rate must be computed.
c. a gain should be recognized by the debtor.
d. no interest expense should be recognized in the future.
16. In a debt extinguishment in which the debt is settled by a transfer of assets with a fair value
less than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. None of these answer choices are correct.
17. Long-term debt that matures within one year and is to be converted into shares should be
reported
a. as a current liability.
b. in a special section between liabilities and equity.
c. as part current and part non-current.
d. as non-current if the refinancing agreement is completed by the end of the year.
Multiple Choice-Problem
1. The balance in Coco Company accounts payable account at December 31, 2020 was
P3,550,000 before any necessary year-end adjustments relating to the following:
• Goods were in transit to Coco from a vendor on December 31, 2020. The invoice cost was
P150,000. The goods were shipped FOB shipping point on December 29, 2020 and were
received on January 2, 2021.
• Goods shipped FOB destination on December 21, 2020; from a vendor to Coco, were
received on January 6, 2021. The invoice cost was P96,000
• On December 27, 2020, Coco wrote and recorded checks totaling P180,000 which were
mailed on January 10, 2021.
In Coco’s December 31, 2020 statement of financial position, how much should be the accounts
payable?
a. P3,976,000
b. P3,880,000
c. P3,796,000
d. P3,700,000
2. Ever Company issues P10,000,000, 6%, 5-year bonds dated January 1, 2020 on January 1,
2020. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued
to yield 5%. The present value factors are:
2.5% 3.0% 5.0% 6.0%
Present value of a single sum for 5 periods .88385 .86261 .78353 .74726
Present value of a single sum for 10 periods .78120 .74409 .61391 .55839
Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236
Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009
What are the proceeds from the bond issue?
a.P10,000 b. P10,432,988 c. P10,437,618 d. P10,434,616
3. Farmer Company issues P10,000,000 of 10-year, 9% bonds on March 1, 2020 at 97 plus

accrued interest. The bonds are dated January 1, 2020 and pay interest on June 30 and
December 31. What is the total cash received on the issue date?

2nd Sem A.Y.2020-2021
a. P9,700,000 b. P10,225,000 c. P9,850,000 d. P9,550,000
4. A company issues P20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2021. Interest
is paid on June 30 and December 31. The proceeds from the bonds are P19,604,145. Using
effective-interest amortization, how much interest expense will be recognized in 2021?
a. P780,000 b. P1,560,000 c. P1,568,498 d. P1,568,332
5. A company issues P20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2021. Interest
is paid on June 30 and December 31. The proceeds from the bonds are P19,604,145. Using
effective-interest amortization, what will the carrying value of the bonds be on the December 31,
2021 statement of financial position?
a. P19,612,643 b. P20,000,000 c. P19,625,125 d. P19,608,310
6. On October 1, 2020 Mack Corporation issued 5%, 10-year bonds with a face value of P1,000,000
at 108 (a 4% yield). Interest is paid on October 1 and April 1, with any premiums or discounts
amortized on an effective-interest basis. The entry to record the issuance of the bonds would
include
a. P25,000 credit to Interest Payable.
b. P80,000 credit to discount on bonds payable
c. P80,000 debit to premium on bonds Payable.
d. P80,000 credit to premium on bonds Payable.
7. Using the date for number 6, bond interest expense reported on the December 31, 2020 income
statement of Mack Corporation amounts to
a. P10,800 b. P12,500 c. P13,500 d. P21,600
8. BigBang Company issues P10,000,000, 8%, 10-year bonds at 96.5 on July 1, 2020. Interest is
paid on July 1 and January 1. The journal entry to record the issuance will include
a. a debit to cash for P10,000,000
b. a credit to cash for P9,650,000
c. a debit to discount on bonds payable for P350,000
d. a credit to premium on bonds payable for P350,000
9. The 12% bonds payable of Nyman Co. had a carrying amount of P832,000 on
December 31, 2019. The bonds, which had a face value of P800,000, were issued at a premium to
yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30
and December 31. On June 30, 2020, several years before their maturity, Nyman retired the bonds
at 104 plus accrued interest. The loss on retirement, ignoring taxes, is
a. P0 b. P6,400. c. P9,920. d. P32,000
10. On December 31, 2020, Nuke Company is in financial difficulty and cannot pay a note due
that day. It is a P600,000 note with P60,000 accrued interest payable to Piper, Inc. Piper agrees
to accept from Nuke a building that has a fair value of P590,000, an original cost of P530,000,
and accumulated depreciation of P130,000. How much gain on the settlement of debt is to be
recognized by Nuke?
a. P0 b. P10,000 c. P60,000 d. P70,000
11. Using the data for number 10, the gain or loss on the disposal of the building was
a. P0 b. P190,000 gain c. P60,000 gain d. P70,000 loss

2nd Sem A.Y.2020-2021
GRADING SYSTEM
Class Standing
Quizzes 50%
Assignments 20% 70%
Departmental Exam 30%
Total 100%
Midterm Grade + Final Term Grade

Final Grade =
2
REFERENCES/ READING MATERIALS
• Robles, Nenita S. and Empleo, Patricia M., Intermediate Accounting 1 (2020 Edition). Millennium
Books Inc.
• Robles, Nenita S. and Empleo, Patricia M., Intermediate Accounting 2 (2019 Edition). Millennium
Books Inc.
• IAS 1: Presentation of Financial Statements, https://www.ifrs.org/issued-standards/list-of-

standards/ias-1-presentation-of-financial-statements/
• IAS 28: Investments in Associates and Joint Ventures, https://www.ifrs.org/issued-

standards/list-of-standards/ias-28-investments-in-associates-and-joint-ventures/
• IAS 36: Impairment of Assets, https://www.ifrs.org/issued-standards/list-of-standards/ias-36-

impairment-of-assets/
• IAS 38: Intangible Assets, https://www.ifrs.org/issued-standards/list-of-standards/ias-38-

intangible-assets/
• IAS 40: Investment Property, https://www.ifrs.org/issued-standards/list-of-standards/ias-40-

investment-property/
• IFRS 5: Non-current Assets Held for Sale and Discontinued Operations,

https://www.ifrs.org/issued-standards/list-of-standards/ifrs-5-non-current-assets-held-for-sale-
and-discontinued-operations/
• IFRS 9: Financial Instruments, https://www.ifrs.org/issued-standards/list-of-standards/ifrs-9-

financial-instruments/

2nd Sem A.Y.2020-2021

ACCO 20093 - Intermediate Accounting 2 1

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

College of Accountancy and Finance

INSTRUCTIONAL MATERIALS FOR

Module 1: Intangible Assets……….…………………………………………………... 3-7

Module 2: Investment Property……………………………. ………………………… 8 - 14

Module 3: Non-Current Assets Held for Sale……..………………………………… 15 - 18

Module 4: Investment in Equity Securities…….……………………………………. 19 - 30

Module 5: Investment in Debt Securities…………………………………………….. 31 - 39

Module 6: Financial Liabilities…………………………………………………………. 40 - 63

Grading System ………………………………………………………………………… 64

References/ Reading Materials……………………………………………………….. 64

ACCO 20093: INTERMEDIATE ACCOUNTING 2 1

Upon completion of the course, the students will be able to:

ACCO 20093: INTERMEDIATE ACCOUNTING 2 2

NATURE OF INTANGIBLE ASSETS

ACQUISITION OF INTANGIBLE ASSETS

ACCO 20093: INTERMEDIATE ACCOUNTING 2 3

Research and development costs

In-process research and development acquired in a business combination

Internally generated brands, mastheads, titles, lists

Certain other defined types of costs

ACCO 20093: INTERMEDIATE ACCOUNTING 2 4

Classification of intangible assets based on useful life

ACCO 20093: INTERMEDIATE ACCOUNTING 2 5

What amount should be capitalized as cost of patent?

What amount should be reported as intangible asset?

ACCO 20093: INTERMEDIATE ACCOUNTING 2 6

During 2019, the entity paid P145,000 in successfully defending an attempted

What amount should be reported as gain from sale of patent in 2019?

ACCO 20093: INTERMEDIATE ACCOUNTING 2 7

DEFINITION OF INVESTMENT PROPERTY

ACCO 20093: INTERMEDIATE ACCOUNTING 2 8

Property held under an operating lease

Intracompany rentals - Property rented to a parent, subsidiary, or fellow subsidiary

Measurement subsequent to initial recognition

ACCO 20093: INTERMEDIATE ACCOUNTING 2 9

Fair value model

TRANSFERS TO OR FROM INVESTMENT PROPERTY CLASSIFICATION

ACCO 20093: INTERMEDIATE ACCOUNTING 2 10

From Transferred Category Treatment

PRESENTATION ON THE STATEMENT OF FINANCIAL POSITION

Disclosures under the Fair Value Model and Cost Model

ACCO 20093: INTERMEDIATE ACCOUNTING 2 11

Additional Disclosures for the Fair Value Model

Additional Disclosures for the Cost Model

ACCO 20093: INTERMEDIATE ACCOUNTING 2 12

The property was appraised at the end of each year as follows:

ACCO 20093: INTERMEDIATE ACCOUNTING 2 13

ACCO 20093: INTERMEDIATE ACCOUNTING 2 14

REQUISITE TO BE HELD FOR SALE:

HIGHLY PROBABLE MEANS:

ACCO 20093: INTERMEDIATE ACCOUNTING 2 15

NONCURRENT ASSETS TO BE ABANDONED

MEASUREMENT NCA HELD FOR SALE OR DISPOSAL GROUP

ACCO 20093: INTERMEDIATE ACCOUNTING 2 16

Financial Statement Presentation

Financial Statement Disclosures

ACCO 20093: INTERMEDIATE ACCOUNTING 2 17

The depreciation expense to be recognized in 2020 is ______________.

ACCO 20093: INTERMEDIATE ACCOUNTING 2 18

ACCOUNTING FOR INVESTMENTS

OWNERSHIP DEGREE OF INFLUENCE APPLICABLE STANDARD

CLASSIFICATION OF EQUITY INVESTMENTS