NOTES IN TERM BONDS AND SERIAL BONDS (DISCOUNT OR PREMIUM)

STEPS IN SOLVING THE PROBLEM:

1) Determine if Term Bonds (matures once) or Serial Bonds (matures periodically).
2) Identify the given (Face Value, Purchase Price, Nominal Rate, Effective Interest Rate).
3) Identify if Premium or Discount (FV vs PP)
4) Identify if Premium or Discount (NR vs EIR)
5) Prepare Amortization Table.
6) Prepare Journal Entries.

SIMILAR TERMS:
 Face Value Face Amount
 Purchase Price Acquisition Cost
 Present Value Carrying Amount
 Nominal Rate Unang binanggit, mas malapit sa face value
 Effective Interest Rate Huling binanggit, mas malapit sa purchase price

WAYS TO CHECK IF DISCOUNT OR PREMIUM:

 Discount:
 Face Amount > Purchase Price (nakatipid)
 Effective Interest Rate > Nominal Rate
 Premium:
 Purchase Price > Face Amount (mas napagastos)
 Nominal Rate > Effective Interest Rate

AMORTIZATION TABLE:
 Term Bonds:
1) Date
2) Interest Received (I-e-entry as Interest Income)
3) Interest Income (Total = Balance ng T-accounts ng cash)
4) Amortization (Total = Discount/Premium)
5) Present Value (Actual value ng bonds as of date)
 Serial Bonds:
1) Date (date of acquisition – maturity date/date of sale)
2) Principal (usually constant, taken from FV)
3) Interest Received (FV x NR) (A)
4) Interest Income (PV x EIR) (B)
5) Amortization (B – A) (C)
6) Present Value (previous PV + C)

PRESENT VALUE:
1) Term Bonds (Discount) – PP to FV (pataas)
2) Term Bonds (Premium) – PP to FV (pababa)
3) Serial Bonds (Discount or Premium) – PP to Zero (pa-zero)
 TERM BOND – DISCOUNT (AMORTIZED COST)

On Jan 1, 2016 an investor acquired P1 000 000 face amount bonds, dated Jan 1, 2018. The life of the
bonds is 2 years and 8% interest is payable semiannually on June 30 and Dec 31. The cost of the bonds
is P964 540, a price which will yield a 10% effective interest rate per year.

Face Value P 1 000 000

Purchase Price 964 540
Discount P 35 460

Nominal Rate 8%
Effective Interest Rate 10%

DATE INTEREST INTEREST AMORTIZATION PRESENT

RECEIVED INCOME VALUE
Jan 01, 2016 - - - P 964 540
Jun 30, 2016 P 40 000 P 48 227 P 8 227 972 767
Dec 31, 2016 40 000 48 638 8 638 981 405
Jun 30, 2017 40 000 49 070 9 070 990 475
Dec 31, 2017 40 000 49 525 9 525 1 000 000

2016
Jan 01 Investment in Bonds at Amortized Cost P 964 540
Cash P 964 450

Jun 30 Cash 40 000

Interest Income 40 000

Investment in Bonds at Amortized Cost 8 227

Interest Income 8 227

Dec 31 Cash 40 000

Interest Income 40 000

Investment in Bonds at Amortized Cost 8 638

Interest Income 8 638

2017
Jun 30 Cash 40 000
Interest Income 40 000

Investment in Bonds at Amortized Cost 9 070

Interest Income 9 070

Dec 31 Cash 40 000

Interest Income 40 000

Investment in Bonds at Amortized Cost 9 525

Interest Income 9 525

2018
Jan 01 Cash 1 000 000
Investment in Bonds at Amortized Cost 1 000 000
 TERM BOND – PREMIUM (AMORTIZED COST)

On Jan 1, 2016 an investor acquired P1 000 000 face amount bonds, dated Jan 1, 2018. The bonds
mature in 3 years and bear 12% interest payable annually every Dec 31. The cost of bonds is P1 049
740, a price which will yield an effective interest of 10%

Face Value P 1 000 000

Purchase Price 1 049 740
Discount P 49 740

Nominal Rate 12%

Effective Interest Rate 10%

DATE INTEREST INTEREST AMORTIZATION PRESENT

RECEIVED INCOME VALUE
Jan 01, 2016 - - - P 1 049 740
Dec 31, 2016 P 120 000 P 104 974 P 15 026 1 034 714
Dec 31, 2017 120 000 103 471 16 529 1 018 185
Dec 31, 2018 120 000 101 815 18 185 1 000 000

2016
Jan 01 Investment in Bonds at Amortized Cost P 1 049 740
Cash P 1 049 740

Dec 31 Cash 120 000

Interest Income 120 000

Interest Income 15 026

Investment in Bonds at Amortized Cost 15 026

2017
Dec 31 Cash 120 000
Interest Income 120 000

Interest Income 16 529

Investment in Bonds at Amortized Cost 16 529

2018
Dec 31 Cash 120 000
Interest Income 120 000

Interest Income 18 185

Investment in Bonds at Amortized Cost 18 185

2019
Jan 01 Cash 1 000 000
Investment in Bonds at Amortized Cost 1 000 000
 SERIAL BOND – PREMIUM (AMORTIZED COST)

Face amount of bonds P 4 000 000

Acquisition Cost 4 171 810
Premium on the bonds 171 810
Annual Installment on Dec 31, 2016 and every Dec 31 thereafter 1 000 000
Date of issue Jan 01, 2016
Nominal interest rate payable annually every Dec 31 10%
Effective interest rate 8%

Face Value P 4 000 000

Purchase Price 4 171 810
Premium P 171 810

Nominal Rate 10%

Effective Interest Rate 8%
DATE PRINCIPAL INTEREST INTEREST AMORTIZATION PRESENT
RECEIVED INCOME VALUE
Jan 01, 2016 - - - - P 4 171 810
Dec 31, 2016 P 1 000 000 P 400 000 P 333 745 P 66 255 3 105 555
Dec 31, 2017 1 000 000 300 000 248 444 51 556 2 053 999
Dec 31, 2018 1 000 000 200 000 164 320 35 680 1 018 319
Dec 31, 2019 1 000 000 100 000 81 681 18 319 0
2016
Jan 01 Investment in Bonds at Amortized Cost P 4 171 810
Cash P 4 171 810

Dec 31 Cash 1 400 000

Investment in Bonds at Amortized Cost 1 000 000
Interest Income 400 000

Interest Income 66 255

Investment in Bonds at Amortized Cost 66 255

2017
Dec 31 Cash 1 300 000
Investment in Bonds at Amortized Cost 1 000 000
Interest Income 300 000

Interest Income 51 556

Investment in Bonds at Amortized Cost 51 556

2018
Dec 31 Cash 1 200 000
Investment in Bonds at Amortized Cost 1 000 000
Interest Income 200 000

Interest Income 35 680

Investment in Bonds at Amortized Cost 35 680

2019
Dec 31 Cash 1 100 000
Investment in Bonds at Amortized Cost 1 000 000
Interest Income 100 000

Interest Income 18 319

Investment in Bonds at Amortized Cost 18 319
 TERM BOND – DISCOUNT (FVOCI)

On Jan 01, 2016, an entity purchased bonds with face amount of P5 000 000 for P4 760 000 including
transaction cost P160 000. The business model is to collect contractual cash flows and to sell the
financial asset. The bonds mature on Dec 31, 2018 and pay 10% interest annually on Dec 31 with a 12%
effective yield. The bonds are sold on Jun 30, 2018 plus accrued interest. Information on fair values is as
follows:

December 31, 2016…………………………………………102

December 31, 2017…………………………………………105
June 30, 2018…………..……………………………………110

Face Value P 5 000 000

Purchase Price 4 760 000
Discount P 240 000

Nominal Rate 10%

Effective Interest Rate 12%

DATE INTEREST INTEREST AMORTIZATION PRESENT

RECEIVED INCOME VALUE
Jan 01, 2016 - - - P 4 760 000
Dec 31, 2016 P 500 000 P 571 200 P 71 200 4 831 200
Dec 31, 2017 500 000 579 744 79 744 4 910 944
Dec 31, 2018 500 000 589 056 89 056 5 000 000

2016
Jan 01 Investment in Bonds - FVOCI P 4 760 000
Cash P 4 760 000

Dec 31 Cash 500 000

Interest Income 500 000

Investment in Bonds - FVOCI 71 200

Interest Income 71 200

Investment in Bonds - FVOCI 268 800

Unrealized Gain - OCI 268 800

2017
Dec 31 Cash 500 000
Interest Income 500 000

Investment in Bonds - FVOCI 79 744

Interest Income 79 744

Investment in Bonds - FVOCI 70 256

Unrealized Gain - OCI 70 256

2018
Dec 31 Interest Receivable (500K*6/12) 250 000
Interest Income 250 000

Investment in Bonds – FVOCI (89 056*6/12) 44 528

Interest Income 44 528
 Cash (FMV+Interest Receivable) P 5 750 000
Unrealized Gain – OCI (Total Unrealized Gains) 339 056
Investment in Bonds – FVOCI (Total Bonds) P 5 294 528
Realized Gain (squeeze) 544 528
Interest Receivable (Same amount as prev.) 250 000

UNREALIZED GAINS:

Fair Market Value P 5 100 000 Fair Market Value P 5 250 000
Amortized Cost ( 4 831 200) Amortized Cost ( 4 910 944)
Unrealized Gain - 2016 P 268 800 Gross Unrealized Gain 339 056
Cumulative Balance (of UG) ( 268 800)
Unrealized Gain - 2017 P 70 256
 RECLASSIFICATION OF DEBT-TYPE FINANCIAL ASSETS (COMPLETE)

On Jan 01, 2017, ABC Co. acquired 10%, P1 000 000 bonds for P951 963. The principal is due on Jan
01, 2020 but interest is due annually. The effective interest rate is 12%. In 2002, ABC Co. changed its
business model. It was ascertained that the investment should be reclassified to another measurement
category. ABC Co. prepares annual financial statements only. Information on fair values follows:

December 31, 2017………………………………………98

December 31, 2018………………………………………103
January 03, 2019…………………………………………104

AMORTIZED COST TO FVPL

2019
Jan 01 Held for Trading Securities P 1 040 000
Investment in Bonds at Amortized Cost P 982 143
Gain on Reclassification 57 857

AMORTIZED COST TO FVOCI

2019
Jan 01 Investment in Bonds - FVOCI P 1 040 000
Investment in Bonds at Amortized Cost P 982 143
Gain on Reclassification - OCI 57 857

FVOCI TO FVPL

2019
Jan 01 Investment in Bonds - FVOCI P 10 000
Unrealized Gain - OCI P 10 000

Held for Trading Securities 1 040 000

Investment in Bonds - FVOCI 1 040 000

Unrealized Gain - OCI 57 857

Gain on Reclassification – P/L 57 857

FVOCI TO AMORTIZED COST

2019
Jan 01 Investment in Bonds - FVOCI P 10 000
Unrealized Gain - OCI P 10 000

Investment in Bonds at Amortized Cost 982 143

Unrealized Gain – OCI 57 857
Investment in Bonds - FVOCI `1 040 000
FVPL TO FVOCI

2019
Jan 01 Held for Trading Securities P 10 000
Unrealized Gain – P/L P 10 000

Investment in Bonds – FVOCI 1 040 000

Held for Trading Securities 1 040 000

FVPL TO AMORTIZED COST

2019
Jan 01 Held for Trading Securities P 10 000
Unrealized Gain – P/L P 10 000

Investment in Bonds at Amortized Cost 1 040 000

Held for Trading Securities 1 040 000
 RECLASSIFICATION OF DEBT-TYPE FINANCIAL ASSETS (SIMPLIFIED)

XYZ Co. changes its business model and determines the following information:

Carrying amount of financial asset under previous classification……………..P 200 000

Fair value on reclassification date (Jan 01, 2019)………………………………P 240 000
The cumulative balance of gain previously recognized in equity………………P 10 000

AMORTIZED COST TO FVPL

2019
Jan 01 Held for Trading Securities P 240 000
Investment in Bonds at Amortized Cost P 200 000
Gain on Reclassification 40 000

AMORTIZED COST TO FVOCI

2019
Jan 01 Investment in Bonds - FVOCI P 240 000
Investment in Bonds at Amortized Cost P 200 000
Gain on Reclassification - OCI 40 000

FVOCI TO FVPL

2019
Jan 01 Investment in Bonds - FVOCI P 40 000
Unrealized Gain - OCI P 40 000

Held for Trading Securities 240 000

Investment in Bonds - FVOCI 240 000

Unrealized Gain - OCI 10 000

Gain on Reclassification – P/L 10 000
FVOCI TO AMORTIZED COST

2019
Jan 01 Investment in Bonds - FVOCI P 40 000
Unrealized Gain - OCI P 40 000

Investment in Bonds at Amortized Cost 230 000

Unrealized Gain – OCI 10 000
Investment in Bonds - FVOCI `240 000
FVPL TO FVOCI

2019
Jan 01 Held for Trading Securities P 40 000
Unrealized Gain – P/L P 40 000

Investment in Bonds – FVOCI 240 000

Held for Trading Securities 240 000

FVPL TO AMORTIZED COST

2019
Jan 01 Held for Trading Securities P 40 000
Unrealized Gain – P/L P 40 000

Investment in Bonds at Amortized Cost 240 000

Held for Trading Securities 240 000
 IMPAIRMENT OF DEBT-TYPE FINANCIAL ASSETS

IMPAIRMENT OF FINANCIAL ASSET MEASURED AT FVOCI

On Jan 01, 2018, ABC C. acquires 10%, 3 year, bonds with face amount of P1 000 000. On Dec 31,
2018, the fair value of the bonds decreased to P850 000.ABC Co. estimates expected credit losses equal
to 12-month expected credit losses of P50 000. On Jan 01, 2019 ABC Co. sells the bonds for P 850 000.

2018
Jan 01 Investment in Bonds - FVOCI P 1 000 000
Cash P 1 000 000

Dec 31 Impairment Loss – P/L 50 000

Unrealized Loss – OCI 100 000
Investment in Bonds - FVOCI 150 000

2019
Jan 01 Cash 850 000
Investment in Bonds - FVOCI 850 000

Loss on Sale 100 000

Unrealized Loss – OCI 100 000

AMORTIZED COST TO FVPL (CESSATION OF IMPAIRMENT)

Gross Carrying amount……………………………………….P 500 000

Loss Allowance (lifetime expected credit losses)…………..P 6 000
Net Carrying Amount………………………………………….P 494 000
Fair value of financial asset – Jan 01 2018…………………P 490 000

2018
Jan 01 Held for Trading Securities P 490 000
Loss Allowance 6 000
Loss on Reclassification 4 000
Investment in Bonds at Amortized Cost P 500 000

AMORTIZED COST TO FVOCI (RETENTION OF IMPAIRMENT)

2018
Jan 01 Investment in Bonds - FVOCI P 490 000
Loss Allowance 6 000
Other Comprehensive Income 4 000
Investment in Bonds at Amortized Cost P 500 000
FVOCI TO AMORTIZED COST (RETENTION OF IMPAIRMENT)

2018
Jan 01 Other Comprehensive Income P 10 000
Investment in Bonds - FVOCI P 10 000

Investment in Bonds at Amortized Cost 500 000

Investment in Bonds - FVOCI 490 000
Other Comprehensive Income `10 000

Other Comprehensive Income 6 000

Loss Allowance 6 000

FVOCI TO FVPL (CESSATION OF IMPAIRMENT)

2018
Jan 01 Other Comprehensive Income P 10 000
Investment in Bonds - FVOCI P 10 000

Held for Trading Securities 490 000

Gain on reclassification 4 000
Investment in Bonds - FVOCI 490 000
Other Comprehensive Income `4 000

FVPL TO AMORTIZED COST (COMMENCEMENT OF IMPAIRMENT)

2018
Jan 01 Unrealized Loss – P/L P 10 000
Held for Trading Securities P 10 000

Investment in Bonds at Amortized Cost 490 000

Held for Trading Securities 490 000

Impairment Loss – P/L 6 000

Loss Allowance 6 000

FVPL TO FVOCI (COMMENCEMENT OF IMPAIRMENT)

2018
Jan 01 Unrealized Loss – P/L P 10 000
Held for Trading Securities P 10 000

Investment in Bonds – FVOCI 490 000

Held for Trading Securities 490 000

Impairment Loss – P/L 6 000

Other Comprehensive Income 6 000
 PURCHASE PRICE OF BONDS (ON INTEREST DATE)

Face amount of bonds P 3 000 000

Date of issue Jan 01, 2016
Date of maturity Jan 01, 2018
Semiannual Interest Jan 01 and Jul 01
Nominal interest rate payable annually every Dec 31 8%
Effective interest rate 6%

PV of Ordinary Annuity
N = 4 (2 years pero semiannual)
I = 3% (6% every year)

Sa basic calculator, press 1.03 ÷ ÷ = M± = M± = M± = M± RM

PV Factor = 3.7171

(4% x 3 000 000) P 120 000

(3% x 3 000 000) (90 000)
30 000 (Positive means Premium kaya ia-add sa FV)
X 3.7171
111 513
3 000 000
P 3 111 513

COMPUTATION OF EFFECTIVE INTEREST RATE (TRANSACTION COST)

At the beginning of current year, an entity purchased bonds with face amount of P5 000 000 at a cost of
P4 650 000. The nominal rate is 10% payable annually every year-end. The bonds mature in 5 years.

11%

PV of 1 0.5935
PV of Ordinary Annuity 3.6959

PV of Principle P 2 967 500

PV of Future Interest Payments 1 847 950
P 4 815 450 (higher than PP)

12%

PV of 1 0.5674
PV of Ordinary Annuity 3.6048

PV of Principle P 2 837 000

PV of Future Interest Payments 1 802 400
P 4 639 400 (lower than PP)

X - 1%
12% - 11%

4 650 000 – 4 815 450

4 639 400 – 4 815 450

165 450 = 0.94

176 050

11% + 0.94% = 11.94%