TRISHA L.

MANABAT

SUMMARY: CHAPTER 19 FINANCIAL ASSET AT AMORTIZED COST BOND INVESTMENT

What is a Bond?

- a written agreement between the issuer and the investor that requires the issuer
to make periodic payments at a stated rate until the principal sum is paid.
- issuer : debtor ; investor : creditor
- issued in small denomination of P100, P1 000, or P10 000 to enable the issuer to
purchase the bond issue.
- Interest --- income

Classification of Bond Investment

a. Financial Asset held for Trading

b. Financial Asset at Amortized Cost
c. Financial Asset at Fair Value Thru Other Comprehensive Income
d. Financial Asset at Fair Value Thru Profit or Loss by irrevocable designation or
by fair value option

Measurements of Bond Investments

INITIAL MEASUREMENT SUBSEQUENT MEASUREMENT

For Non-trading:
GENERAL RULE: a. @ Fair Value Thru P/L
FV + TC
b. @ Amortized Cost
- FV : fair value
- TC : transaction cost directly attributable c. @ Fair Value Thru Other
to the acquisition Comprehensive Income

For Trading or at Fair Value Thru P/L:

GENERAL RULE:
FV

- FV : fair value
*Transaction cost is expensed right away.

ACQUISITION OF BOND INVESTMENTS

ON INTEREST DATE B/N INTEREST DATE

Purchase Price = Acquisition Cost +

Accrued Interest
Purchase Price = Acquisition Cost
Accrued Interest should be accounted for
separately to either Interest Income or
Accrued Interest Receivable.
INVESTMENT IN BONDS AT AMORTIZED COST

A financial asset shall be measured at amortized cost only if:

a. The business model is to hold the financial asset in order to collect contractual
cash flows on specified dates.
b. The contractual cash flows are solely payments of principal and interest on the
principal amount outstanding.

Initial Amount of Investment xx

Repayments (xx)
Amortization Discount xx
Amortization Premium (xx)
Impairment/Uncollectibility (xx)
Amortized Cost xx

AMORTIZATION OF PREMIUM OR DISCOUNT

Investment in bonds are subsequently measured at amortized cost. Hence, any

premiums or discount included in the acquisition must be amortized as well.

a. Amortization of Bond Discount

Investment in Bonds xx
Interest Income xx

b. Amortization of Bond Premium

Interest Income xx
Investment in Bonds xx

CONCEPTS ON AMORTIZATION

1. Premiums and discount are amortized in order to bring the carrying amount of the
investment to its face amount on the date of maturity.
2. Bond Premium is a loss on the part of the investor. The premium is to be deducted
from the interest income.
3. Bond discount is a gain on the part of the investor. It is added to the interest
income.

CALLABLE BONDS
- are those which are called in or redeemed by the issuing entity prior to their date
of maturity.
- Profit or Loss = Redemption Price – Carrying Amount of the Investment

CONVERTIBLE BONDS
- are those which give the investor the right to exchange their bonds for share
capital of the issuer at any time prior to maturity.
- Financial Asset Measured at Fair Value.
SERIAL BONDSP

- Bonds that have a series of maturity dates or those which could be paid in
installments.

Example:

A P 3 000 000 bond issued on January 1, 2019 may provide that the bond will mature
as follows:

December 31, 2019 1 000 000

December 31, 2020 1 000 000
December 31, 2021 1 000 000

TERM BONDS

- Bonds that mature on a single date

- Callable and convertible bonds can be classified as term bonds despite their
special features.

METHODS OF AMORTIZATION

a. Straight Line Method

- equal amount of premium and discount for each accounting period.

b. Bond Outstanding Method

- applicable to serial bonds and provides for a decreasing amount of
amortization.

c. Effective interest method

- Increasing amount of amortization