Chapter 12A Investment in debt securities - amortized cost

Objectives:
To understand:
1 Initial and subsequent measurement of investment in debt securities at amortized
2 The amount of interest income from investment in debt securities at amortized co
3 The application of amortization table to debt securities and different interest paym
4 The accounting for debt security with interest payment date not on reporting date
5 The effect and subsequent accounting of capitalized transaction costs.
6 The accounting for sale of investment in debt securities at amortized cost..

Investment in debt securities at amortized cost

Both are met:
Business model is to collect contractual cash flows
Cash flows are solely payments of principal and interest

Accounting for Amortized Cost Classification

Amortized Cost
Initial measurement FV plus transactions costs

Subsequent At amortized cost amounts based on

measurement amortization table. FV is ignored.

Changes in FV Ignored

Interest income Beg of the period amortized cost X

EIR determined on initial recognition

Interest received Face amount x stated or nominal rate x pe

 Subsequent Amortized using either straight-line,
accounting for bond outstanding and EI method
premium or
discount
Gain or loss on sale Reported in P/L

The amortized cost represents the present value of the remaining cash flows dis
In the absence of transaction costs, effective interest rate = market yield on initia
recognition.
Consequently, market yields at the end of each reporting period shall be ignored

Methods Description
Straight-line Simplest among the methods. Equal amounts of disco
Generally, used when the initial fair value is computed

Bonds-outstanding Based on the remaining face amount of debt security.

bonds when the initial fair value is computed using quo

Effective interest Uses effective interest rate that exactly discounts estim
expected life of the financial set to the carrying amoun
This is used when the initial fair value is computed usin

Scenario Interest income vs Interest received

Discount Interest income > Interest received
Premium Interest income < Interest received

Effects of transaction costs in subsequent measurement

a decrease in the amount of discount
b increase in the amount of premium

Investments with interest payment date other than reporting date

Partial amortization is applicable
Accrual of interest from the latest payment date to the reporting date is recorded

Sale of amortized cost debt securities on interest payment date

 Same with debt securities accounted for at FVTPL
Difference is recognized in P/L

Scenario Gain or Loss

Proceeds > CA Realized gain on sale
Proceeds < CA Realized loss on sale

Sale of amortized cost debt securities not on interest payment date

a The amortized cost shall be updated.
b Similar to FVTPL classification, accrued interest will be received from the buyer f
rtized cost

bt securities at amortized cost.

ecurities at amortized cost.
nd different interest payment frequencies.
ate not on reporting date.
nsaction costs.
at amortized cost..

ctual cash flows

principal and interest

FVTPL
FV only, transaction costs are
expensed outright

FV as of each reporting date

Recognized as unrealized
gain or loss in P/L

Face amount x stated or

nominal rate

ted or nominal rate x period

 Not considered

ported in P/L

emaining cash flows discounted using the effective interest rate determined on initial recognition.
e = market yield on initial
g period shall be ignored. Amortization table concepts discussed in Chapter 5A are also relevant in t

Equal amounts of discount or premium

al fair value is computed using quoted price approach.

amount of debt security. Used for serial

e is computed using quoted price approach.

at exactly discounts estimated future cash payments or receipts through the

et to the carrying amount of a financial asset. The only method that is in accordance with the require
ir value is computed using the present value approach.

Amount of Amortized cost

Increasing amortized cost
Decreasing amortized cost

EIR < Market yield

porting date is recorded

eceived from the buyer from the immediately preceding interest payment date up to the date of sale
ed on initial recognition.

er 5A are also relevant in this case.

ccordance with the requirements of PFRS 9.

date up to the date of sale.
STRAIGHT-LINE METHOD

On June 30, 2023, ALGIERS Company invested in six-year corporate bonds with
Acquisition price is equal to 97.75 plus accrued interest. The nominal interest is p
Originally, the bonds were dated January 1, 2022. Quoted prices of the bonds as
(Use straight-line method in amortizing the discount or premium)

Required: Determine the amortization table over the bonds' remaining term and t

Discount of P67,500 shall be amortized from June 30, 2023 to December 31

(4.5 years) as follows:
Interest Received Interest Income
Date 9%
6/30/2023
12/31/2023 135,000.00 142,500.00
12/31/2024 270,000.00 285,000.00
12/31/2025 270,000.00 285,000.00
12/31/2026 270,000.00 285,000.00
12/31/2027 270,000.00 285,000.00

6/30/2023 Financial asset at amortized cost

Interest receivable
Cash

12/31/2023 Cash
Financial asset at amortized cost
Interest receivable
Interest income

12/31/2024 Cash
Financial asset at amortized cost
Interest income

BOND OUTSTANDING METHOD

At the beginning of 2023, VILLA Company acquired five-year, P10,000,000 face amoun
The bonds are accounted for at amortized cost. The face amount is payable in five equal
Interest of 12% is payable at the same dates as the principal installment payments. (Use b

Required: Determine the amortization table over the bonds' remaining term and the journ

The P450,000 discount shall be amortized as follows:

YEAR BEG. BAL RATIO

2023 10,000,000.00 0.33
2024 8,000,000.00 0.27
2025 6,000,000.00 0.20
2026 4,000,000.00 0.13
2027 2,000,000.00 0.07
30,000,000.00

Date Principal Interest

Received
1/1/2023 12%
12/31/2023 2,000,000.00 1,200,000.00
12/31/2024 2,000,000.00 960,000.00
12/31/2025 2,000,000.00 720,000.00
12/31/2026 2,000,000.00 480,000.00
12/31/2027 2,000,000.00 240,000.00

1/1/2023 Financial asset at amortized cost

Cash

12/31/2023 Cash
Financial asset at amortized cost
Interest Income

12/31/2023 Cash
Financial asset at amortized cost

12/31/2024 Cash
Financial asset at amortized cost
 Interest Income

Cash
Financial asset at amortized cost

EFFECTIVE INTEREST RATE METHOD

YEREVAN Company acquired a 7% interest-bearing, P3,000,000 face amount d

The debt security is originally dated January 1, 2020 and has an original term of
As of December 31, 2023 and 2024, market yields averaged 8.50% and 8%, res

Required: Under each of the following independent scenarios, determine the am

Interest is payable every December 31 of each year.
Interest is payable every June 30 and December 31 of each year.

SCENARIO 1

PV Factor of PV Factor
Single payment for 3 periods at 9% 0.772183
Ordinary annuity for 3 periods at 9% 2.531295

Interest Interest
Date Received Income
7% 9%
1/1/2023
12/31/2023 210,000.00 256,331.00
12/31/2024 210,000.00 260,501.00
12/31/2025 210,000.00 265,046.00

1/1/2023 Financial asset at amortized cost

Cash

12/31/2023 Cash
Financial asset at amortized cost
Interest income
12/31/2024 Cash
Financial asset at amortized cost
Interest income

SCENARIO 2

PV Factor of PV Factor
Single payment for 6 periods at 4.5% 0.767896
Ordinary annuity for 6 periods at 4.5% 5.157872

Interest Interest
Date Received Income
3.5% 4.5%
1/1/2023
6/30/2023 105,000.00 128,037.00
12/31/2023 105,000.00 129,074.00
6/30/2024 105,000.00 130,157.00
12/31/2024 105,000.00 131,289.00
6/30/2025 105,000.00 132,472.00
12/31/2025 105,000.00 133,708.00

1/1/2023 Financial asset at amortized cost

Cash

6/30/2023 Cash
Financial asset at amortized cost
Interest income

12/31/2023 Cash
Financial asset at amortized cost
Interest income

6/30/2023 Cash
Financial asset at amortized cost
Interest income
12/31/2024 Cash
Financial asset at amortized cost
Interest income

COMPREHENSIVE PROBLEM
On January 1, 2023, NASSAU Company invested in 5,000 newly issued, five-yea
The bonds are to be accounted for at amortized cost. Interest of 10% is payable

PV Factor of PV Factor
Single payment for 5 periods at 9% 0.649931
Ordinary annuity for 5 periods at 9% 3.889651

Interest Interest
Date Received Income
10.0% 9.0%
1/1/2023
12/31/2023 500,000.00 467,503.00
12/31/2024 500,000.00 464,579.00
12/31/2025 500,000.00 461,391.00
12/31/2026 500,000.00 457,916.00
12/31/2027 500,000.00 454,128.00

All of the bonds were sold on December 31, 2024 at its clean price of 102.40

Cash
Loss on sale
Financial asset at amortized cost

All of the bonds were sold on December 31, 2025 at its clean price of 101.60

Cash
Loss on sale
Financial asset at amortized cost
All of the bonds were sold on July 1, 2025 at its dirty price of 107.20.

Interest receivable
Financial asset at amortized cost
Interest income

Cash
Financial asset at amortized cost
Interest receivable
Gain on sale

P3,000,000 of the bonds were sold on December 31, 2025 at clean price of 101.

Cash
Loss on sale
Financial asset at amortized cost

P4,000,000 of the bonds were sold on September 30, 2024 at its dirty price of 11

Interest receivable
Financial asset at amortized cost
Interest income

Cash
Financial asset at amortized cost
Interest receivable
Gain on sale

P2,000,000 of the bonds were sold on December 31, 2026 at its clean price of 10

Cash
Loss on sale
Financial asset at amortized cost
orporate bonds with face amount of P3,000,000 and interest of 9% to be accounted for at amortized
nominal interest is payable every December 31 of each year.
ces of the bonds as of December 31, 2023 and 2024 were 98.10 and 98.70, respectively.

emaining term and the journal entries for the years 2023 and 2024

23 to December 31, 2027

Amortization PV/CA

2,932,500.00
7,500.00 2,940,000.00
15,000.00 2,955,000.00
15,000.00 2,970,000.00
15,000.00 2,985,000.00
15,000.00 3,000,000.00

2,932,500.00
135,000.00
3,067,500.00

270,000.00
7,500.00
135,000.00
142,500.00

270,000.00
15,000.00
285,000.00
0,000,000 face amount, newly issued corporate bonds for 95.50.
payable in five equal annual installments every December 31 of each year.
ment payments. (Use bond-outstanding method in amortizing the discount or premium)

ng term and the journal entries for the years 2023 and 2024

450,000.00

DISC AMORT
150,000.00
120,000.00
90,000.00
60,000.00
30,000.00
450,000.00

Interest Income Amortization PV/CA

9,550,000.00
1,350,000.00 (1,850,000.00) 7,700,000.00
1,080,000.00 (1,880,000.00) 5,820,000.00
810,000.00 (1,910,000.00) 3,910,000.00
540,000.00 (1,940,000.00) 1,970,000.00
270,000.00 (1,970,000.00) -

9,550,000.00
9,550,000.00

1,200,000.00
150,000.00
1,350,000.00

2,000,000.00
2,000,000.00

960,000.00
120,000.00
 1,080,000.00

2,000,000.00
2,000,000.00

,000 face amount debt security on January 1, 2023 to be accounted for at amortized cost.
an original term of six years. Market yields on the date of acquisition averaged 9%.
8.50% and 8%, respectively.

, determine the amortization table over the bonds' remaining term and the journal entries for the yea

Cash Flow Fair Value, 1/1/23

3,000,000.00 2,316,549.00
210,000.00 531,571.95
2,848,121.00

Amortization PV/CA

2,848,121.00
46,331.00 2,894,452.00
50,501.00 2,944,953.00
55,046.00 3,000,000.00

2,848,121.00
2,848,121.00

210,000.00
46,331.00
256,331.00
 210,000.00
50,501.00
260,501.00

Cash Flow Fair Value, 1/1/23

3,000,000.00 2,303,688.00
105,000.00 541,576.56
2,845,265.00

Amortization PV/CA

2,845,265.00
23,037.00 2,868,302.00
24,074.00 2,892,376.00
25,157.00 2,917,533.00
26,289.00 2,943,822.00
27,472.00 2,971,294.00
28,708.00 3,000,000.00

2,845,265.00
2,845,265.00

105,000.00
23,037.00
128,037.00

105,000.00
24,074.00
129,074.00

105,000.00
25,157.00
130,157.00
 105,000.00
26,289.00
131,289.00

ewly issued, five-year, government bonds, each with P1,000 face amount when market yields averag
of 10% is payable every December 31 of each year.

Cash Flow Fair Value, 1/1/23

5,000,000.00 3,249,655.00
500,000.00 1,944,825.50
5,194,481.00

Amortization PV/CA

5,194,481.00
(32,497.00) 5,161,984.00
(35,421.00) 5,126,563.00
(38,609.00) 5,087,954.00
(42,084.00) 5,045,870.00
(45,872.00) 5,000,000.00

price of 102.40

5,120,000.00
6,563.00
5,126,563.00

price of 101.60

5,080,000.00
7,954.00
5,087,954.00
 250,000.00
19,304.00
230,696.00

5,360,000.00
5,107,259.00
250,000.00
2,741.00

clean price of 101.70.

3,051,000.00
1,772.00
3,052,772.00

t its dirty price of 110.50.

375,000.00
26,566.00
348,434.00

4,420,000.00
4,108,334.00
300,000.00
11,666.00

its clean price of 100.80.

2,016,000.00
2,348.00
2,018,348.00
ccounted for at amortized cost.

0, respectively.
amortized cost.
ged 9%.

ournal entries for the years 2023 and 2024:

hen market yields averaged 9%.
Chapter 12C Investments in Debt Securities - FVTOCI

Objectives
To understand:
1 The initial and subsequent measurement of investment in debt securities at FVTO
2 The accounting for the unrealized gain or loss - OCI.
3 The accounting for the selling of investment in debt securities at FVTOCI.

Investment in debt securities at FVTOCI

Both are met:
Business model is both to collect contractual cash flows and sell financial as
Cash flows are solely payments of principal and interest

FVTOCI
Initial measurement FV + transaction costs

Transaction costs Capitalized

Subsequent measurement At FV

Interest income Beg. Of the period

amortized cost x EIR

Use of amortization table Yes

Changes in FV Reported in OCI

Amounts separately reported in equity Cumulative unrealized

gains or losses - OCI

Recognition of gain or loss on sale P/L including the

reclassification of
cumulative unrealized
gains or losses - OCI
Debt securities at FVTOCI Vs Equity Securities at FVTOCI

Unrealized gains and losses from debt securities at FVTOCI

1 Compare the computed amortized cost in the amortization table with the corresp
FV > Amortized cost Cumulative net unrealized gains in OCI
FV < Amortized cost Cumulative net unrealized losses in OCI

2 Changes in the cumulative net unrealized gains or losses in OCI from the PY to t
Selling of debt securities at FVTOCI on interest payment date
Any difference between CA and proceeds is reported immediately as realized ga

Scenario Gain or Loss

Proceeds > CA Realized gain on sale
Proceeds < CA Realized loss on sale

Related cumulative unrealized gain or loss - OCI shall be recognized in P/L (recl

Cumulative OCI balance Accounting procedures

Cumulative unrealized gain - OCI The amount is debited and added to the
Cumulative unrealized loss - OCI The amount is credited and deducted fr
ebt securities at FVTOCI.

es at FVTOCI.

s and sell financial assets

Amortized cost FVTPL

FV + transaction costs FV

Capitalized Expensed outright

At amortized cost based on table At FV

Beg. Of the period amortized cost Face amount X stated or

x EIR nominal rate\

Yes No

Not recognized P/L

None None

P/L P/L
able with the corresponding FV on each reporting date.
Addition to the equity
Deduction from equity

OCI from the PY to the CY are reported as unrealized gains or losses in the CY's OCI:
diately as realized gain or loss in P/L:

cognized in P/L (reclass adjustment)

bited and added to the gain on sale or deducted from the loss on sale.
dited and deducted from the gain on sale or added to the loss on sale.
the CY's OCI:
HANOI Company acquired an eight-year, newly issued government bonds with f
Market rages averaged 9%. Interest of 7% is payable every December 31 of eac
As of December 31, 2023, 2024, 2025, and 2026, quoted prices were 89.25, 92.3

Required: Under each of the following independent scenarios, determine the rele

PV Factor of
Single payment for 8 periods at 9%
Ordinary annuity for 8 periods at 9%

Interest
Date Received
7%
1/1/2023
12/31/2023 280,000.00
12/31/2024 280,000.00

Amortized
Date Cost
12/31/2023 3,597,362.00
12/31/2024 3,641,125.00

On December 31, 2023, all of the bonds were sold for 90.30.

Cash
Financial asset at FVTOCI
Gain on sale - P/L

Gain on sale - P/L

Unrealized loss - OCI

On December 31, 2023, all of the bonds were sold for 88.75.

Cash
Loss on sale - P/L
 Financial asset at FVTOCI

Loss on sale - P/L

Unrealized loss - OCI

On December 31, 2023, 2,500,000 of the bonds were sold for 90.10

Cash
Financial asset at FVTOCI
Gain on sale - P/L

Gain on sale - P/L

Unrealized loss - OCI

On December 31, 2024, all of the bonds were sold for 91.60.

Cash
Loss on sale - P/L
Financial asset at FVTOCI

Unrealized gain - OCI

Loss on sale - P/L
Gain on sale - P/L

On December 31, 2024, all of the bonds were sold for 92.75.

Cash
Financial asset at FVTOCI
Gain on sale - P/L

Unrealized gain - OCI

Gain on sale - P/L

On December 31, 2024, P1,500,000 of the bonds were sold for 92.80

Cash
Financial asset at FVTOCI
Gain on sale - P/L
 Unrealized gain - OCI
Gain on sale - P/L

COMPREHENSIVE PROBLEM

VILA Company acquired a 7% interest-bearing, P8,000,000 face amount debt se

The debt security is originally dated January 1, 2020 and has an original term of
As of December 31, 2023 and 2024, quoted prices were 97.45 and 98.25, respec

Required: Under each of the following independent scenarios, determine the jour
and the carrying amount of the investment as of December 31, 2023 and 2024:

The debt security is accounted for at FVTPL.

PV Factor of PV Factor
Single payment for 7 periods at 9% 0.547034
Ordinary annuity for 7 periods at 9% 5.032953

1/1/2023 Financial asset at FVTPL

Cash

12/31/2023 Cash
Interest income

12/31/2023 Financial asset at FVTPL

Unrealized gain - P/L

12/31/2024 Cash
Interest income

12/31/2024 Financial asset at FVTPL

Unrealized gain - P/L

The debt security is accounted for at amortized cost.

PV Factor of PV Factor
Single payment for 7 periods at 9% 0.547034
Ordinary annuity for 7 periods at 9% 5.032953

Date Interest Interest

received income
7% 9%
1/1/2023
12/31/2023 560,000.00 647,525.00
12/31/2024 560,000.00 655,403.00

1/1/2023 Financial asset at amortized cost

Cash

12/31/2023 Cash
Financial asset at amortized cost
Interest income

12/31/2024 Cash
Financial asset at amortized cost
Interest income

The debt security is accounted for at FVTOCI.

PV Factor of PV Factor
Single payment for 7 periods at 9% 0.547034
Ordinary annuity for 7 periods at 9% 5.032953

Date Interest Interest

received income
7% 9%
1/1/2023
12/31/2023 560,000.00 647,525.00
12/31/2024 560,000.00 655,403.00
 Amortized
Date Cost
12/31/2023 7,282,251.00
12/31/2024 7,377,654.00

Beg. Cum. Unrealized

Date Gain (Loss)
12/31/2023 -
12/31/2024 513,749.00

1/1/2023 Financial asset at FVTOCI

Cash

12/31/2023 Cash
Financial asset at FVTOCI
Interest income

12/31/2023 Financial asset at FVTOCI

Unrealized gain - OCI

12/31/2024 Cash
Financial asset at FVTOCI
Interest income

12/31/2024 Unrealized loss - OCI

Financial asset at FVTOCI

Carrying amounts of investment per Scenario:

12/31/2023
FVTPL 7,796,000.00
Amortized Cost 7,282,251.00
FVTOCI 7,796,000.00
 government bonds with face amount of P4,000,000 on January 1, 2023 to be accounted for at FVTO
very December 31 of each year.
ed prices were 89.25, 92.30, 91.80, and 93.80, respectively.

narios, determine the relevant journal entries in recording the sale transaction:

4,000,000.00
PV Factor Cash Flow Fair Value, 1/1/23
0.50 4,000,000.00 2,007,464.00
5.53 280,000.00 1,549,749.32
3,557,213.00
Interest
Income Amortization PV/CA
9%
3,557,213.00
320,149.00 40,149.00 3,597,362.00
323,763.00 43,763.00 3,641,125.00

Fair value/ Cum. Unrealized gain

Carrying amount (loss) - OCI in equity
3,570,000.00 (27,362.00)
3,692,000.00 50,875.00

or 90.30.

3,612,000.00
3,570,000.00
42,000.00

27,362.00
27,362.00

or 88.75.

3,550,000.00
20,000.00
 3,570,000.00

27,362.00
27,362.00

sold for 90.10

2,252,500.00
2,231,250.00
21,250.00

17,101.00
17,101.00

or 91.60.

3,664,000.00
28,000.00
3,692,000.00

50,875.00
28,000.00
22,875.00

or 92.75.

3,710,000.00
3,692,000.00
18,000.00

50,875.00
50,875.00

e sold for 92.80

1,392,000.00
1,384,500.00
7,500.00
 19,078.00
19,078.00

000 face amount debt security on January 1, 2023.

d has an original term of ten years. Market yields on the date of acquisition averaged 9%.
e 97.45 and 98.25, respectively.

narios, determine the journal entries to be made from 2023 to 2024,

ber 31, 2023 and 2024:

Cash Flow Fair Value, 1/1/23

8,000,000.00 4,376,272.00
560,000.00 2,818,453.68
7,194,726.00
7,194,726.00
7,194,726.00

560,000.00
560,000.00

601,274.00 7,796,000.00
601,274.00

560,000.00
560,000.00

64,000.00
64,000.00
 8,000,000.00
Cash Flow Fair Value, 1/1/23
8,000,000.00 4,376,272.00
560,000.00 2,818,453.68
7,194,726.00

Amort. Amortized
Cost

7,194,726.00
87,525.00 7,282,251.00
95,403.00 7,377,654.00

7,194,726.00
7,194,726.00

560,000.00
87,525.00
647,525.00

560,000.00
95,403.00
655,403.00

8,000,000.00
Cash Flow Fair Value, 1/1/23
8,000,000.00 4,376,272.00
560,000.00 2,818,453.68
7,194,726.00

Amort. Amortized
Cost

7,194,726.00
87,525.00 7,282,251.00
95,403.00 7,377,654.00
 Fair value/ Cum. Unrealized gain
Carrying amount (loss) - OCI in equity
7,796,000.00 513,749.00
7,860,000.00 482,346.00

End. Cum. Unrealized Unrealized Gain (Loss)

Gain (Loss) OCI
513,749.00 513,749.00
482,346.00 (31,403.00)

7,194,726.00
7,194,726.00

560,000.00
87,525.00
647,525.00

513,749.00
513,749.00

560,000.00
95,403.00
655,403.00

31,403.00
31,403.00

er Scenario:
12/31/2024
7,860,000.00
7,377,654.00
7,860,000.00
ccounted for at FVTOCI.
eraged 9%.