CHAPTER 19 – FA @ AMORTIZED COST
BOND INVESTMENT
► FINANCIAL ASSET AT AMORTIZED COST
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 outstanding.
 FA@AC is only debt securities, there is no equity securities
because equity securities has no specified dates and as well
as interest.
 Pwede rin ang bonds sa FVPL at FVOCI, Bonds is a classic
example of FA@AC kaya pwedeng tawaging Investment in
Bonds.
► BONDS
╚ A formal unconditional promise made under seal to pay a
specified sum of money at a determinable future date and
make periodic interest payments at a state rate until the
principal sum is paid.
╚ A bond is a contract of debt whereby one party called the
issuer borrows fund from another party called the investor.
╚ A bond is a debt security because the bondholder is a
creditor and the issuer is a debtor.
 May utangang nangyayari, contract of debt, merong
maturity/due date.
 Other than the principal, nagbabayad ka din ng
interest.
╚ A bond is evidenced by a certificate and the contractual
agreement between the issuer and investor is contained in
another document known as “bond indenture”.
 Sa certificate nakalagay yung Principal, Interest at
Maturity date.
 Sa Indenture nakalagay yung mga agreements ng
both parties.
╚ A bond is issued in small denomination of P100, P1,000, or
P10,000 to enable more investors to purchase the bond
issue.
EXAMPLE: A P50,000,000 bond issue may be issued in
denomination of P1,000, Thus, there share be 50,000 bonds
with face of P1,000 each.
╚ An investor acquires a bond either as a temporary or
permanent investment and derives regular income in the
form of interest.
► KINDS OF BONDS
1. Term Bonds
╚ Bonds that mature on a single date.
2. Serial Bonds
╚ Those which have a series of maturity dates or those bonds
which are payable in instalments.
3. Callable Bonds
╚ Those which may be called in or redeemed by the issuing
entity prior to their date of maturity.
 Pwedeng bayaran ng issuer yung bonds, tatawagin
nila para bayaran na kahit hindi pa umabot sa
maturity date.
4. Convertible Bonds
╚ Those which give the bondholders the right to exchange
their bonds for share capital of the issuing entity at any time
prior to maturity.
► INTEREST PAYMENT DATE
╚ The interest on the bond investment is usually paid semiannually or every 6 months as follows:
a. January 1 and July 1
b. February 1 and August 1
c. March 1 and September 1
d. April 1 and October 1
e. May 1 and November 1
f. June 1 and December 1
╚ Of course there are certain bonds that pay interest annually
or at the end of the bond year.
 Kapag nagbayad yung investor nang mas mataas
face value that is Premium.
 Kapag nagbayad ng mas mababa yung investor
that is Discount.
► CLASSIFICATION OF BOND INVESTMENT
╚ Bonds may be acquired as current or noncurrent investment
depending on the business model of managing financial
assets.
╚ Accordingly, bond investment are classified and
accounted for as follows:
a. Financial Asset held for Trading
b. Financial Asset at Amortized Cost
c. FA@FVOCI
d. FA@FVPL or by irrevocable designation or by fair value
option
► INITIAL MEASUREMENT
╚ Bond investments are recognized initially at fair value plus
transaction costs that are directly attributable to the
acquisition. (Fair Value + Transaction Costs)
╚ However, transaction costs attributable to the acquisition of
bond investments held for trading at FVPL are expensed
immediately.
► SUBSEQUENT MEASUREMENT
╚ Subsequent to initial recognition, bond investments are
measured and accounted for as follows:
a. At FVPL
b. At Amortized cost
c. At FVOCI
 On the part of the bondholder or the investor, discounts are
treated as additional income or interest. Unti-untiing
irerecognize ng investor yung discount through amortization,
year by year.
 Kapag Premium naman, it is treated as a reduction of
income. It is recognized same with the discount through
amortization.
► ACCOUNTING OF BOND INVESTMENT
╚ Bonds may be acquired on interest date or between interest
dates.
╚ When bonds are acquired on interest date, there is no
accounting problem because the purchase price is initially
recognized at acquisition cost.
╚ When bonds are acquired between interest dates, meaning
the date of acquisition is not any one of the interest dates,
the purchase price normally includes the accrued interest.
╚ That portion of the purchase price representing accrued
interest should not be reported as part of the cost of
investment but should be accounted for separately.
╚ In effect, in this case, two assets are acquired, namely the
bonds and the accrued interest. On the date of acquisition,
the accrued interest is charged either to accrued interest
receivable or interest income.
╚ When accrued interest receivable is debited, upon receipt
of the first semi-annual interest, the accrued interest
receivable account is closed and interest income is
credited for the excess.
╚ When interest income is debited, the receipt of the first
semi-annual interest is credited entirely to interest income.
► ACCRUED INTEREST ON DATE OF ACQUISITION
╚ An entity acquired 12% bonds with face amount of
P2,000,000 for P2,200,000 which includes accrued interest of
P20,000. The bonds are held for “trading”.
Trading Securities
2,180,000
Accrued Interest Receivable
20,000
Cash
2,200,000

ANOTHER APPROACH
╚ The accrued interest purchased or paid is charged to
“interest income” instead of accrued interest receivable.
╚ Using the same example, the journal entry to record the
acquisition of the bond investment is:
Trading Securities
2,180,000
Interest Income
20,000
Cash
2,200,000
╚ The subsequent collection of interest is simply credited to
interest income.
╚ Thus, when the semi-annual interest of 120,000 is received,
the journal entry is :
Cash (.12 x 2,000,000 x 6/12) 120,000
Interest Income
120,000
╚ The above approach is more convenient and will be
followed for illustration.
Illustration – Trading Securities
╚ April 1
Purchased P1,000,000 12% bonds at 96 plus accrued
interest. Interest is payable January 1 and July 1. The
bonds are held as trading investment.
Trading Securities
960,000
Interest Income
30,000
Cash
990,000
 Note that the accrued interest is for 3 months,
from January 1 to April 1. (1,000,000 x .12 x 3/12)
to get P30,000. (.96 x 1,000,000) to get P960,000.
╚ July 1
Received semi-annual interest:
Cash
60,000
Interest Income
60,000
(.12 x 1,000,000 x 6/12)
╚ When the first semi-annual interest of P120,000 is received,
the journal entry is:
Cash
120,000
Accrued Interest Receivable
20,000
Interest Income
100,000
╚ Oct. 31
Sold P600,000 face value bonds for 101 plus accrued
interest.
Sale Price (600,000 x 1.01)
606,000
Add: Accrued Interest (July 1 – Oct 31)
(.12 x 600,000 x 4/12)
24,000
TOTAL CASH RECEIVED
630,000
Sale Price
Less: Carrying amount of bonds sold
(600K/1M or 6/10 x 960,000)
GAIN ON SALE
Cash
╚ Dec 31
576,000
30,000
630,000
Trading Securities
Interest Income
Gain on Sale of TS
╚ Dec 31
606,000
576,000
24,000
30,000
Recorded the accrued interest from July 1 to Dec. 31
on the remaining bonds of P400,000:
Accrued Interest Receivable 24,000
Interest Income
24,000
(.12 x 400,000 x 6/12)
 The accrued interest on the P400,000 face amount is
for 6 months from July 1 to December 31.
The bonds are quoted at 120 at the end of the year.
Changes in fair value of trading securities are recognized in profit or loss.
Market Value (400,000 x 1.20)
480,000
Carrying amount of remaining bonds
(960,000 – 576,000)
(384,000)
UNREALIZED GAIN
96,000
Trading Securities
96,000
Unrealized Gain – TS
96,000
 When bond investment is held for “trading” or
measured at FVPL, it is not necessary to amortize any
premium or discount.
► INVESTMENT IN BONDS AT AMORTIZED COST
╚ A financial asset shall be measured at amortized cost if both
of the following conditions are met:
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.
╚ AMORTIZED COST
Initial Recognition Amount
Minus: Repayments (Applicable on Serial Bonds)
Plus: Amortization of Discount
Minus: Amortization of Premium
Minus: Reduction for Impairment or Uncollectibility
╚ When bonds are acquired and classified as financial asset
at amortized cost, the bond investments are classified as
noncurrent investments.
► AMORTIZATION OF PREMIUM OR DISCOUNT
╚ Investment in bonds shall be measured subsequently at
amortized cost.
╚ This means that any premium or discount on the acquisition
of long-term investment in bonds must be amortized.
╚ Bond premium or discount is amortized over the life of the
bonds. On the part of the bondholder, the life of the bonds
is from the date of acquisition to the date of maturity.
╚ Amortization is done through the interest income account.
a. Amortization of Bond Discount:
Investment in Bonds
xxx
Interest Income
xxx
b. Amortization of Bond Premium:
Interest Income
xxx
Investment in Bonds
xxx
╚ Amortization may be made on interest dates or at the end
of the reporting period. It is more convenient to record
amortization at the end of the reporting period.
► PHILOSOPHY ON AMORTIZATION
╚ The reason for amortization of bond premium or discount is
to bring the carrying amount of the investment to face
amount on the date of maturity.
╚ When the bonds are redeemed on the date of maturity, the
entry will simply be a debit to cash and credit to investment
in bonds at face value.
╚ The bondholder is a creditor and will collect on the date of
maturity an amount equal only to the face amount of the
bonds no more and no less.
╚ Such process of allocation,
Bond Premium – deduction from the interest income
Bond Discount – addition to interest income…
…is what traditionally called amortization.
► ACQUISITION ON INTEREST DATE
╚ 2020
April 1
Purchased P1,000,000 face amount 12% bonds at 94.
Bonds pay interest semi-annually April 1 to October 1
and mature on April 1, 2025.
Investment in Bonds
940,000
Cash (1,000,000 x .94)
940,000
 In as much as the acquisition is on interest date, April
1, there is no accrued interest involved.
October 1
╚ On the other hand, bond discount is a gain on the part of
the bondholder because the bondholder paid less than
what can be collected on the date of maturity.
╚ Such gain is not recognized outright but allocated over the
life of the bonds to be added to the interest income derived
from the bond investment.
60,000
60,000
Dec. 31
Adjustment for accrued interest for 3 months.
Accrued Interest Receivable 30,000
Interest Income
30,000
(.12 x 1,000,000 x 3/12)
Dec. 31
Amortization of the bond discount for 9 months from
April 1 to Dec. 31, 2020. To simplify the illustration, the
straight line method of amortization is used.
Face Amount
1,000,000
Cost of Bonds
(940,000)
DISCOUNT
60,000
╚ Conceptually, bond premium is a loss on the part of the
bondholder because the bondholder paid more than what
can be collected on the date of maturity.
╚ Such loss is not recognized outright but allocated over the
life of the bonds to be offset against the interest income to
be derived from the bond investment.
Received semi-annual interest.
Cash (.12 x 1,000,000 x 6/12)
Interest Income
Annual Amortization (60,000 / 5 yrs.)
12,000
Amortization for 9 months (12k x 9/12)
Investment in Bonds
Interest Income
9,000
9,000
9,000
╚ 2021
January 1
April 1
October 1
Reversal of the adjustment for accrued interest
on December 31, 2020.
Interest Income
30,000
Accrued Interest Receivable 30,000
Received semi-annual interest.
Cash
60,000
Interest Income
60,000
Received semi-annual interest.
Cash
60,000
Interest Income
60,000
December 31 Adjustment for accrued interest for 3 months.
Accrued Interest Receivable 30,000
Interest Income
30,000
Adjustment for amortization of bond discount
for 1 year:
Investment in Bonds
12,000
Interest Income
12,000
 Note that during the life of the bonds, the
investment account, after giving due
recognition for discount amortization will
appear as follows:
INVESTMENT IN BONDS
April 1, 2020 Cost
940,000 Balance, Apr. 1, 2025 1,000,000
Dec. 31, 2020 Amortization
9,000
Dec. 31, 2021 Amortization 12,000
Dec. 31, 2022 Amortization 12,000
Dec. 31, 2023 Amortization 12,000
Dec. 31, 2024 Amortization 12,000
April 1, 2025 Amortization
3,000
1,000,000
1,000,000
 Observe that on the maturity date, April 1, 2025, the
carrying amount of the investment is P1,000,000, an
amount equal to the face amount of the bond.
╚ The redemption of the bonds may then be simply recorded.
Cash
1,000,000
Investment in Bonds
1,000,000
► ACQUISITION BETWEEN INTEREST DATES
╚ 2021
Feb. 1
Purchased 12% P1,000,000 face amount bonds at 105
plus accrued interest on February 1, 2021. Interest is
payable semi-annually on April 1 and October 1.
Bonds are dated April 1, 2020 and mature on April 1,
2025:
Investment in Bonds
1,050,000
Interest Income
40,000
Cash
1,090,000
Cost (1,000,000 x 1.05)
Accrued Interest from
Oct. 1, 2020 to Feb 1, 2021
(.12 x 1,000,000 x 4/12)
TOTAL CASH PAID
1,050,000
40,000
1,090,000
April 1
Received semi-annual interest:
Cash (.12 x 1,000,000 x 6/12) 60,000
Interest Income
60,000
Oct. 1
Received semi-annual interest:
Cash (.12 x 1,000,000 x 6/12) 60,000
Interest Income
60,000
Dec. 31
Adjustment for accrued interest for 3 months from
Oct. 1 to Dec. 31, 2021:
Accrued Interest Receivable 30,000
Interest Income
30,000
(.12 x 1,000,000 x 3/12)
Dec. 31
Adjustment for the amortization of the bond premium
from February 1 to December 31, 2021 or 11 months
using the straight line method of amortization.
Interest Income (11 x 1,000)
11,000
Investment in Bonds
11,000
Life of Bonds =
02/01/21 to 04/01/25
50 months
Monthly amortization (50,000 /50)
1,000
 Yung 50,000 galing sa binayad ng bondholder na
1,050,000, kasi sobra ng 50,000 dapat ma-amortize
yung sobra hanggang maging 1,000,000.
 Note that when bonds are acquired between interest
dates, it is more convenient to compute monthly
amortization rather than annual amortization.
╚ In succeeding years, similar entries will be prepared. If
proper amortizations are made, the investment account will
appear as follows:
INVESTMENT IN BONDS
Feb 1, 2021
1,050,000 Dec. 31, 2021 Amortization
11,000
Dec. 31, 2022 Amortization
12,000
Dec. 31, 2023 Amortization
12,000
Dec. 31, 2024 Amortization
12,000
April 1, 2025 Amortization
3,000
Balance April 1, 2025
1,000,000
1,050,000
1,050,000
 Monthly amortization na 1,000 multiplied to 12 months to get
12,000 (12 x 1,000)
╚ Again on the date of maturity, when the bonds are
redeemed by the issuing entity, the journal entry is:
Cash
1,000,000
Investment in Bonds
1,000,000
► SALE OF BONDS PRIOR TO MATURITY
╚ When investment in bonds is sold prior to the date of
maturity, it is necessary to determine the carrying amount of
the bond investment to be used as basis in computing gain
or loss on the sale.
╚ In such case, amortization of the premium or discount
should be recognized up to the date of sale.
╚ If the sale is between interest dates, the sale price normally
includes the accrued interest.
╚ Accordingly, that portion of the sale price pertaining to the
accrued interest should be credited to interest income.
╚ The difference between the sale price, after deducting the
accrued interest, and the carrying amount of the bond
investment represents the gain or loss on the sale of the
investment.
(Sale Price – Accrued Interest – Carrying amount =
Gain/Loss)
Illustration
╚ 2020
Aug. 1
Purchased 12% P1,000,000 face amount bonds for
P1,075,000 including accrued interest. Interest is
payable semi-annually May 1 and November 1.
Bonds are dated May 1, 2020 and mature May 1,
2024.
Total Cash Paid
1,075,000
Accrued Interest May 1 – 08/1/20
(.12 x 1,000,000 x 3/12)
(30,000)
COST OF BOND INVESTMENT
1,045,000
Investment in Bonds
Interest Income
Cash
1,045,000
30,000
1,075,000
 Note that the cash payment of P1,075,000 includes accrued
interest.
 The accrued interest purchased is not part of cost. Thus, the
same is deducted from the cash paid.
Nov. 1
Dec. 31
Received semi-annual interest:
Cash (.12 x 1,000,000 x 6/12) 60,000
Interest Income
60,000
Adjustment for the accrued interest for 2 months from
November 1 to December 31, 2020.
Accrued Interest Receivable 20,000
Interest Income
20,000
(.12 x 1,000,000 x 2/12)
Adjustment for the amortization of premium from
August 1 to December 31, 2020 or 5 months. The
straight line method of amortization is used.
Life of Bonds
Aug. 1, 2020 – May 1, 2024
45 months
Monthly Amortization (45,000 / 45)
1,000
Interest Income (5 x 1,000)
Investment in Bonds
5,000
5,000
╚ SALE OF BONDS
On February 1, 2022, the bonds were sold at 108 plus
accrued interest.
Sale Price (1,000,000 x 1.08)
Add: Accrued Interest for 3 months
from Nov. 1 2021 to February 1, 2022
(.12 x 1,000,000 x 3/12)
TOTAL CASH RECEIVED
1,080,000
30,000
1,110,000
Original Cost
Less: Amortization from Aug. 1 2020 to
Feb. 1, 2022 or 18 months x 1,000
CARRYING AMOUNT OF BONDS 02/01/22
1,045,000
Sale Price (1,000,000 x 1.08)
Carrying Amount Of Bonds 02/01/22
GAIN ON SALE
1,080,000
(1,027,000)
53,000
18,000
1,027,000
╚ JOURNAL ENTRIES ON THE DATE OF SALE, FEBRUARY 1, 2022
a. To update the amortization of the premium up to the date of
sale, February 1, 2022. Presumably, the last amortization was
December 31, 2021.
Investment Income (1 month x 1,000)
1,000
Investment in Bonds
1,000
b. To record the sale of bonds:
Cash
1,110,000
Investment in Bonds
Interest Income
Gain on Sale of Bond Investment
1,027,000
30,000
53,000
► CALLABLE BONDS
╚ Those which may be called in or redeemed by the issuing
entity prior to their date of maturity.
╚ Usually, the call price or redemption price and the carrying
amount of the bond investment on the date of redemption
is recognized in profit or loss.
► CONVERTIBLE BONDS
╚ Those which give the bondholders the right to exchange
their bonds for share capital of the issuing entity at any time
prior to maturity.
╚ The existence of the conversion feature generally precludes
classification of the convertible bonds as financial assets at
amortized cost because that would be inconsistent with
paying for the conversion feature, meaning the right to
convert into equity shares before maturity.
╚ Accordingly, investment in convertible bonds can be
classified as financial asset measured at fair value.
► SERIAL BONDS
╚ Those which have a series of maturity dates or those bonds
which are payable in instalments.
EXAMPLE: A P1,000,000 bond issued on January 1, 2020 may
provide that the bond will mature as follows:
December 31, 2020
200,000
December 31, 2021
200,000
December 31, 2022
200,000
December 31, 2023
200,000
December 31, 2024
200,000
► TERM BONDS
╚ Those 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 – provides for an equal amount of
premium or discount amortization each accounting period.
Straight Line Method – Discount
Face Amount of Bonds
Acquisition Cost on Jan. 1, 2020
Discount on the bonds
Date of Bonds
Date of Maturity
Interest payable semi-annually on
June 30 and December 31
2,000,000
1,850,000
150,000
January 1, 2020
January 1, 2023
12%
╚ Following the straight line method, the annual amortization
of discount is simply computed by dividing the discount of
P150,000 by the life of the bonds of 3 years or P50,000.
(150,000 / 3 years) = 50,000
╚ Schedule of annual amortization of the discount
2020
50,000
2021
50,000
2022
50,000
TOTAL BOND DISCOUNT
150,000
╚ JOURNAL ENTRIES FOR 2020
1. Acquisition on January 1:
Investment in Bonds
Cash
1,850,000
1,850,000
2. Collection of semi-annual interest on June 30:
Cash (.12 x P2,000,000 x 6/12) 120,000
Interest Income
120,000
3. Collection of semi-annual interest on December 31:
Cash
120,000
Interest Income
120,000
4. Annual Amortization of discount:
Investment in Bonds
50,000
Interest Income
50,000
Straight Line Method – Premium
Face Amount of bonds
2,000,000
Acquisition Cost on January 1, 2020
2,200,000
Premium on the bonds
200,000
Date of Bonds
January 1, 2020
Date of Maturity
January 1, 2024
Interest payable annually on
December 31
12%
╚ Following the straight line method, the annual amortization
is simply computed by dividing the premium of P200,000 by
the life of bonds of 4 years or P50,000.
(200,000 / 4 years) = 50,000
╚ Schedule of annual amortization of premium
2020
50,000
2021
50,000
2022
50,000
2023
50,000
TOTAL BOND PREMIUM
200,000
╚ JOURNAL ENTRIES FOR 2020
1. Acquisition on January 1:
Investment in Bonds
Cash
b. BOND OUTSTANDING METHOD – applicable to serial bonds and
provides for a decreasing amount of amortization.
Bond Outstanding Method – Discount
Face amount of bonds
2,000,000
Acquisition cost on January 1, 2020
1,900,000
Discount on the bonds
100,000
Annual instalment on Dec. 31, 2020 and
every December 31 thereafter
500,000
Date of bonds
January 1, 2020
Interest payable semi-annually on
June 30 and December 31
12%
Year Bond Outstanding
2020
2,000,000
2021
1,500,000
2022
1,000,000
2023
500,000
5,000,000
Fraction
20/50
15/50
10/50
5/50
Discount Amortization
40,000
30,000
20,000
10,000
100,000
╚ The bond outstanding is determined every bond year. Thus,
the bond outstanding for 2020 is P2,000,000 and is
decreased by the payment of P500,000 each year.
2,200,000
2,200,000
2. Collection of annual interest on December 31:
Cash (.12 x 2,000,000)
240,000
Interest Income
240,000
3. Annual Amortization of the premium:
Interest Income
50,000
Investment in Bonds
50,000
╚ The fractions are developed from the bond outstanding
column.
╚ The annual discount amortization is computed by
multiplying the fractions by the amount of the discount. Thus,
for 2020, 20/50 times P100,000 equals P40,000 and so on.
╚ JOURNAL ENTRIES
2020
Jan. 1
Investment in Bonds
Cash
1,900,000
1,900,000
Jun. 30
Cash (.12 x 2,000,000 x 6/12) 120,000
Interest Income
120,000
Semi-annual interest
Dec. 31
Cash
Interest Income
120,000
120,000
Investment in Bonds
40,000
Interest Income
40,000
Amortization of discount for 2020
Cash
Investment in Bond
First Instalment
2021
Jun. 30
Dec. 31
500,000
500,000
Cash (.12 x 1,500,000 x 6/12) 90,000
Interest Income
90,000
Semi-annual interest
Cash
Intererst Income
90,000
90,000
Investment in Bonds
30,000
Interest Income
30,000
Amortization for 2021
Cash
Investment in Bonds
Second instalment
500,000
500,000
Bond Outstanding Method – Premium
Face amount of bonds
4,000,000
Acquisition cost on Jan. 1, 2020
4,200,000
Premium on the bonds
200,000
Annual instalment on Dec. 31, 2020 and
Every December 31 thereafter
1,000,000
Date of bonds
Jan.1, 2020
Interest payable annually on December 31
12%
╚ ANNUAL AMORTIZATION OF PREMIUM
Year
Bond Outstanding
Fraction
Premium Amortization
2020
4,000,000
4/10
80,000
2021
3,000,000
3/10
60,000
2022
2,000,000
2/10
40,000
2023
1,000,000
1/10
20,000
10,000,000
200,000
╚ The bond outstanding for 2020 is P4,000,000 and this is
reduced by P1,000,000 each year.
╚ JOURNAL ENTRIES FOR 2020
Jan. 1
Investment in Bonds
Cash
Dec. 31
4,200,000
4,200,000
Cash (.12 x 4,000,000) 480,000
Interest Income
480,000
Annual Interest
Interest Income
80,000
Investment in Bonds
80,000
Amortization for 2020
Cash
1,000,000
Investment in Bonds
1,000,000
First Instalment
c. EFFECTIVE INTEREST METHOD – “interest method”/scientific
method. It provides for an increasing amount of amortization.
╚ Bond investments shall be classified as financial assets
measured at amortized cost using the effective interest
method.
╚ This means that any discount or premium must be amortized
using the effective interest method.
╚ The straight line method 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 using the effective interest method.
PROBLEMS – CHAPTER 19
► 19 – 1
╚ At the beginning of current year, Icon Company acquired
bonds with face amount of P4,000,000 at a cost of
P3,761,000. The bonds are held for trading.
╚ Bonds pay interest of 12% semi-annually on January 1 and
July 1 and mature after 4 years.
╚ The bonds have an effective yield of 14% and are quoted
at 105 at year end.
Required: Prepare journal entries for the current year.
Jan 1
Trading Securities
Cash
3,761,000
3,761,000
July 1
Cash (.12 x 4,000,000 x 6/12)
Interest Income
240,000
240,000
Dec. 31
Accrued Interest Receivable 240,000
Interest Income
240,000
(.12 x 4,000,000 x 6/12)
Market Value (4,000,000 x 1.05) 4,200,000
Carrying amount of Bonds
3,761,000
UNREALIZED GAIN
439,000
Trading Securities
Unrealized Gain – TS
439,000
439,000
╚ Mature Company carried out the following transactions in
bond investments held for trading during the current year.
Aug. 1 Purchased 5,000, P1,000, 12% bonds of Acme
Company at 104 plus accrued interest of P150,000.
The bonds pay interest semi-annually on May 1 and
November 1.
Aug. 31 Purchased 2,000, P1,000, 12% bonds of Avco
Company at 98 plus accrued interest. Semi-annual
payment of interest, June 30 and December 31.
Dec. 1
Dec. 31 The following quotations were obtained:
Acme Bonds
98
Avco Bonds
99
Required:
a. Prepare journal entries to record the transactions.
b. Present the investments on December 31.
A. JOURNAL ENTRIES
Aug. 1
Trading Securities
(5,000 x P1,000 x 1.04)
Interest Income
Cash
Aug. 31
Nov. 1
► 19 – 2
Sold 2,000 of the Acme bonds at 102 plus accrued
interest.
Dec. 1
5,200,000
150,000
5,350,000
Trading Securitirs
(2,000 x P1,000 x .98)
1,960,000
Interest Income
(.12 x 2,000,000 x 2/12)
40,000
Cash
Cash (.12 x 5,000,000 x 6/12)
Interest Income
Sale Price (2,000,000 x 1.02)
2,000,000
300,000
300,000
2,040,000
Add: Accrued Interest from Nov. 1 to
Dec. 1 (.12 x 2,000,000 x 1/12)
TOTAL CASH RECEIVED
20,000
2,060,000
Sale Price
Less: Carrying Amount of bonds sold
(2M/5M x 5,200,000)
LOSS ON SALE
Cash
2,060,000
Loss on Sale of TS
40,000
Trading Securities
Interest Income
Dec. 31
Acme Bonds
Avco Bonds
2,080,000
(40,000)
2,080,000
20,000
Accrued Interest Receivable 60,000
Interest Income
60,000
(.12 x 3,000,000 x 2/12)
3,000,000 remaining Acme
Nov. 1 to Dec. 31
Cash (.12 x 2,000,000 x 6/12)
Interest Income
120,000
120,000
Unrealized Loss – TS
Trading Securities
160,000
160,000
CARRYING AMOUNT
3,120,000
(5,200,000 – 2,080,000)
1,960,000
(2,000,000 x .98)
5,080,000
MARKET
2,940,000
(3,000,000 x .98)
1,980,000
(2,000,000 x .99)
4,920,000
B. INVESTMENTS
Current Assets:
Trading Securities at FV
► 19 – 3
2,040,000
G/L
(180,000)
20,000
(160,000)
╚ Bullish Company had the following transactions in bond
investment held as trading for the current year.
Mar. 1
Purchased 2,000, P1,000, 12% bonds of Long
Company at 93 excluding accrued interest. Interest is
payable on February 1 and August 1.
Apr. 1
Purchased 4,000, P1,000, 12% bonds of National
Corporation at 95 plus accrued interest. Interest is
payable March 1 and September 1.
Oct. 1
Sold 1,000 of the National bonds at 105 excluding
accrued interest.
Dec. 1
Sold all of the Long bonds at 100 plus accrued interest.
Dec. 31
The market value of the National bonds is 90.
Required:
a. Prepare journal entries to record the transactions including
receipt and accrued interest.
b. Statement presentation of the bond investment on Dec. 31.
A. JOURNAL ENTRIES
Mar. 1
Trading Securities
(2,000 x P1,000 x .93)
Interest Income
(.12 x 2,000,000 x 1/12)
Cash
Apr. 1
4,920,000
Aug. 1
Trading Securities
(4,000 x P1,000 x .95)
Interest Income
(.12 x 4,000,000 x 1/12)
Cash
Cash (.12 x 2,000,000 x 6/12)
1,860,000
20,000
1,880,000
3,800,000
40,000
3,840,000
120,000
Interest Income
Sept. 1
Oct. 1
120,000
Cash (.12 x 4,000,000 x 6/12)
Interest Income
240,000
240,000
Sale Price (1,000,000 x 1.05)
Add: Accrued Interest from Sept. 1
to Oct. 1 (.12 x 1M x 1/12)
TOTAL CASH RECEIVED
10,000
1,060,000
1,060,000
Trading Securities
Interest Income
Gain on Sale of TS
Dec. 1
950,000
10,000
100,000
Sale Price (2,000,000 x 1.0)
Add: Accrued Interest from Aug. 1
To Dec. 1 (.12 x 2M x 4/12)
TOTAL CASH RECEIVED
Dec. 31
Accrued Interest Receivable
2,850,000
(150,000)
Unrealized Loss – TS (National) 150,000
Trading Securities
150,000
B. STATEMENT PRESENTATION
Current Asset:
Trading securities at FV
2,700,000
► 19 – 4
╚ On July 1, 2020, Bearish Company purchased as trading
investment a P2,000,000 face amount 8% bond for
P2,200,000 plus accrued interest and commission of P50,000.
The bond pays interest annually on December 31.
╚ On December 31, 2020, the bond investment was quoted
at 95. On March 31, 2021, the entity sold the bond
investment for P2,100,000 plus accrued interest.
Required: Prepare journal entries for 2020 and 2021.
80,000
2,080,000
2,080,000
Trading Securities
Interest Income
Gain on Sale of TS
2,700,000
2,000,000
Sale Price
2,000,000
Less: Carrying amount of bonds sold 1,860,000
GAIN ON SALE
140,000
Cash
Market Value (3,000,000 x .90)
Carrying Amount of remaining bonds
(3,800,000 – 950,000)
UNREALIZED LOSS
1,050,000
Sale Price
1,050,000
Less: Carrying Amount of bonds sold
(1/4 x 3,800,000)
950,000
GAIN ON SALE
100,000
Cash
Interest Income
120,000
(.12 x 3,000,000 x 4/12)
1,860,000
80,000
140,000
120,000
2020
July 1
Trading Securities
Commission Expense
Interest Income (.08 x 2M x 6/12)
Cash
2,200,000
50,000
80,000
2,330,000
Dec. 31
Cash (.08 x 2,000,000)
160,000
Interest Income
160,000
Market Value (2,000,000 x .95)
1,900,000
Carrying amount of bonds
UNREALIZED LOSS
Unrealized Loss – TS
Trading Securities
2021
March 31
Cash
Trading Securities
Interest Income
Gain on Sale of TS
2,200,000
(300,000)
300,000
300,000
Dec. 31
2,140,000
1,900,000
40,000
200,000
Sale Price
2,100,000
Add: Accrued Interest from Dec. 31
To March 31 (.08 x 2M X 3/12)
40,000
TOTAL CASH RECEIVED
2,140,000
Sale Price
Less: Carrying Amount of Bonds
(2,000,000 x .95)
GAIN ON SALE
Oct. 1
2,100,000
1,900,000
200,000
2021
Jan. 1
July 1
Dec. 31
► 19 – 5
╚ On October 1, 2020, Yost Company purchased 4,000 of the
P1,000 face amount, 10% bonds of Pell Company for
P4,400,000 which included accrued interest of P100,000.
╚ The bonds which mature on January 1, 2027, pay interest
semi-annually on January 1 and July 1.
╚ The entity used straight line method of amortization and
appropriately recorded the bonds as financial asset at
amortized cost.
Required: Prepare journal entries for 2020 and 2021.
2020
► 19 – 6
Investment in Bonds
Interest Income
Cash
4,300,000
100,000
4,400,000
Accrued Interest Receivable 200,000
Interest Income (.10 x 4M x 6/12)
200,000
Life of Bonds = Oct 1, 2020 to Jan. 1, 2027
Monthly Amortization (300,000 / 75)
75 months
4,000
Interest Income (3 x 4,000)
Investment in Bonds
12,000
Cash
12,000
200,000
Accrued Interest Income
Cash (.10 x 4,000,000 x 6/12)
Interest Income
200,000
Accrued Interest Income
Interest Income
200,000
Interest Income (12 x 4,000)
Investment in Bonds
48,000
200,000
200,000
200,000
48,000
╚ Manda Company acquired P6,000,000 of Landoil 12%
bonds on May 1, 2020 at 94 plus accrued interest to be held
as financial asset at amortized cost.
Aug. 1
Dec. 31
╚ The bonds pay interest semi-annually on February 1 and
August 1, and mature on February 1, 2024.
╚ The fiscal period for Manda Company is the calendar
period. Amortization is done following the straight line
method.
╚ On May 1, 2022, Manda Company sold all the bonds at 105
plus accrued interest.
Required: Prepare journal entries for 2020, 2021, and 2022.
2020
May 1
Aug. 1
Dec. 31
2022
Jan. 1
Feb. 1
360,000
Accrued Interest Receivable
(.12 x 6,000,000 x 5/12) 300,000
Interest Income
300,000
Investment in Bonds (12 x 8,000) 96,000
Interest Income
96,000
Interest Income
300,000
Accrued Interest Receivable
300,000
Cash (.12 x 6,000,000 x 6/12)
Interest Income
360,000
360,000
5,820,000
Cash (.12 x 6,000,000 x 6/12)
Interest Income
360,000
Sale Price (6,000,000 x 1.05)
6,300,000
Add: Accrued Interest from Feb. 1 to May 1
(.12 x 6,000,000 x 3/12)
180,000
TOTAL CASH RECEIVED
6,480,000
5,640,000
300,000
Original Cost
Less: Amortization from May 1, 2020 to
May 1, 2022 (24 months x 8,000)
CA OF BONDS MAY 1, 2022
Sale Price
Carrying amount of bonds May 1, 2022
GAIN ON SALE
6,300,000
(5,832,000)
468,000
May. 1
Investment in Bonds (4 x 8,000)
Interest Income
360,000
Accrued Interest Receivable
(.12 x 6,000,000 x 5/12) 300,000
Interest Income
Investment in Bonds (8 x 8,000)
Interest Income
Feb. 1
360,000
Investment in Bonds
(6,000,000 x .94)
5,640,000
Interest Income
(.12 x 6,000,000 x 3/12)
180,000
Cash
Life of bonds = May 1, 2020 to Feb. 1, 2024 45 months
Monthly Amortization (360,000 / 45)
8,000
2021
Jan. 1
Cash (.12 x 6,000,000 x 6/12)
Interest Income
64,000
64,000
Cash
Interest Income
300,000
Accrued Interest Receivable
300,000
Cash (.12 x 6,000,000 x 6/12)
Interest Income
360,000
360,000
► 19 – 7
6,480,000
Investment in Bonds
Interest Income
Gain on Sale of Bonds
32,000
32,000
192,000
5,832,000
5,832,000
180,000
468,000
╚ On January 1, 2020, Flexible Company acquired for
P1,150,000 the entire P1,000,000 12% bond issue of another
entity to be held as financial asset at amortized cost.
╚ Bonds of P200,000 mature at annual interval beginning
December 31, 2020. Interest is payable semi-annually on
June 30 and December 31.
Required:
a. Prepare a schedule of amortization following the bond
outstanding method.
b. Prepare journal entries for the current year.
A. SCHEDULE OF AMORTIZATION
YEAR
BOND OUTSTANDING
2020
2021
2022
2023
2024
FRACTION
1,000,000
800,000
600,000
400,000
200,000
3,000,000
B. JOURNAL ENTRIES
Jan. 1
Investment in Bonds
Cash
10/30
8/30
6/30
4/30
2/30
1,150,000
60,000
Dec. 31 Cash
60,000
60,000
Interest Income
► 19 – 8
╚ The date of the bonds is February 1, 2020 and the interest is
payable semi-annually on February 1 and August 1.
╚ The bonds mature annually at the rate of P1,000,000 on
February 1, 2020 and every February 1 thereafter.
Required:
a. Prepare a schedule of amortization following the bond
outstanding method.
b. Prepare journal entries for 2020 and 2021.
A. SCHEDULE OF AMORTIZATION
YEAR
10/01/20
02/01/21
02/01/21
02/01/22
02/01/22
02/01/23
60,000
MONTH
OUTSTANDIN
G
4 months
PESO
MONTH
FRACTION
DISCOUNT
AMORTIZATION
–
BOND
OUTSTANDI
NG
3,000,000
12,000,000
12/48
75,000
–
2,000,000
12 months
24,000,000
24/48
150,000
–
1,000,000
12 months
12,000,000
12/48
75,000
48,000,000
1,150,000
June 30 Cash (.12 x 1,000,000 x 6/12)
Interest Income
Interest Income
Investment in Bonds
PREMIUM
AMORTIZATION
50,000
40,000
30,000
20,000
10,000
150,000
╚ On October 1, 2020, Complex Company purchased a 12%
P3,000,000 face amount bond issue for P2,700,000
excluding accrued interest to be held as financial asset at
amortized cost.
B. JOURNAL ENTRIES
2020
Oct. 1
Investment in Bonds
2,700,000
Interest Income
(.12 X 3,000,000 x 2/12)
60,000
Cash
50,000
50,000
Dec. 31
Accrued Interest Receivable
150,000
300,000
2,760,000
Interest Income
(.12 x 3,000,000 x 5/12)
Investment in Bonds
56,250
Interest Income
(75,000 x 3 / 4)
Oct 1 to Dec 31 = 3 months
2021
Jan. 1
Feb. 1
150,000
Cash (.12 x 3,000,000 x 6/12) 180,000
Interest Income
180,000
1,000,000
Investment in Bonds
Dec. 31
56,250
Interest Income
150,000
Accrued Interest Income
Cash
Aug. 1
150,000
1,000,000
Cash (.12 x 2,000,000 x 6/12) 120,000
Interest Income
120,000
 Note that every interest payment date the face amount
changes from 3,000,000 , it becomes 2,000,000 because
the 1,000,000 matured last Feb. 1, 2021
Accrued Interest Receivable
Interest Income
150,000
150,000
Jan. 1 to Feb. 1 2021 (75,000 x 1 / 4)
Feb. 1 to Dec. 31 2021 (150,000 x 11/12)
TOTAL AMORTIZATION FOR 2021
18,750
137,500
156,250
Investment in Bonds
Interest Income
156,250
156,250