CHAPTER 26 FINANCIAL ASSET AT 4.

Explain the initial measurement of

AMORTIZED COST bond investment.

Answer:

1. What is bond?  Recognized initially at fair value plus

transaction cost that are directly
Answer:
attributable to the acquisition.
 A bond is a formal unconditional  Transaction cost attributable to the
promise made under seal to pay a acquisition of bond investment held for
specific sum of money at a trading of fair value through profit or
determinable future date and to make loss are expensed immediately.
periodic interest payments at a stated
rate until the principal amount. 5. Explain the subsequent measurement
 Bond is contract of debt whereby one of bond investment.
party called the issuer borrows fund
Answer:
from another party called investor.
a. At fair value through profit or loss
2. Is bond an equity security or debt b. At amortized cost
security? c. At fair value through other
comprehensive income
Answer:

 A bond is a debt security because the 6. Explain the acquisition of bond

bondholder is a creditor and the issuer investments on interest date and
is the debtor. between interest dates.
 A bond is evidenced by a certificate and
Answer:
the contractual agreement between the
issuer and investor is contained in  Bonds acquired in interest date or
another document known as “bond between interest date there is no
debenture” accounting problem because the
purchase price is initially recognized
3. What are the classifications of bonds as the acquisition cost.
investment?  Bonds acquired between interest
dates, meaning the date of
Answer:
acquisition is not any one of the
Bond investment are classified and interest dates, the purchase price
accounted for as follows: normally includes the accrual
interest.
a. Financial asset held for trading
b. Financial asset at amortized cost 7. What is the treatment of accrued
c. Financial asset at fair value through interest included in the purchase price
other comprehensive income of bond investment when bonds are
d. Financial asset at fair value through purchased between interest dates?
profit or loss by irrevocable  Purchase price representing
designation or by fair value option accrued interest should not be

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 reported as part of the cost of
investment but should be
accounted for separately.
 On the date of acquisition, the
accrued interest is charged either
to accrued interest receivable or
interest income.
Accrued Interest Receivable xx
Interest income
8. What are the conditions for measuring
bond investments at amortized cost?
is higher than the current market
interest rates.
10. What is a bond discount?
Answer:
 Bond discount is the amount by
which the market price of a bond is
lower than its principal amount
due at maturity.
xx
 The primary features of a bond are
its coupon rate, face value, and
market price.

Answer: 11. Explain the treatment of premium or

Financial asset shall be measured at discount on trading bond investment.
amortized cost if both of the following Answer:
conditions are met also it is classified as
noncurrent investments: ACCRUED INTEREST ON DATE OF ACQUISITION

a. The business model is hold the JE: To record held for trading
financial asset in order to collect
Trading securities xx
contractual cash flows on specified
dates Accrued interest receivable xx
b. The contractual cash flows are
Cash xx
solely payments of principal and
interest on the principal amount JE: Interest Received
outstanding.
Cash xx
Amortized cost
Accrued interest receivable xx
Investment P xx
Less: Repayments Xx Interest Income xx
Add: Amortization of discounts Xx CHARGED TO INTEREST INCOME
Less: Amortization of premium Xx
Less: Reduction for impairment or Xx Je: Acquisition of bond investment
uncollectibility
Trading securities xx

Interest income xx
9. What is bond premium?
Cash xx
Answer:
JE: Interest Receive
 A premium bond is a bond trading
above its face value or costs more Cash xx
than the face amount on the bond
 A bond might trade at Interest Income xx
a premium because its interest rate

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 12. Explain the treatment of premium or
discount on bond investment
measured at amortized cost.
13. Why is premium or discount amortized
with respect bond investment
classified as financial asset at
amortized cost.
14. Explain briefly callable bonds,
convertible bonds, serial bonds and
term bonds.
15. Enumerate the three methods of
amortizing bond premium.
a. Straight line method- equal amount of
premium and discount amortization
each accounting period.
b. Bond outstanding method- applicable
to serial bonds and provides for
decreasing amount for amortization.
c. Effective interest method- provides for
an increasing amount of amortization.

Note: Bond investment shall be classified as

financial asset measured at amortized cost
using effective interest method.

 Straight line and bond outstanding

method are acceptable only when the
computation will result in periodic
interest income that is not materially
different from the amount that would
be computed.

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