Bond Investment - FVOCI

Subject ： Intermediate Accounting Teacher ： Dessa Dianna Madrid

 A financial asset shall be measured at fair
value through other comprehensive
income if both of the ff. conditions are met
:

a. The business model b. The contractual

is achieved both by cash flow are solely
collecting contractual payments of
cash flow and by principal and interest
selling or tradi the on the principal
financial asset. outstanding.
Business models includes selling or
trading the financial asset in addition to
collecting contractual cash flows.

Interest income is recognized using the effective

interest methy as in amortized cost measurement.

Derecognition of the bond investment at FVOCI: the

cumulative gain or loss previously recognized in other
comprehensive income shall be reclassified to profit or
loss.

Derecognition of equity investment at FVOCI:

the cumulative gain or loss previously recognized
in other comprehensive income shall be
reclassified to retained earnings.
Illustrations
On January 1, 2021, 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 December 31, 2023 and pay 10% interest annually on December 31 with a 12% effective yield.
Financial asset - FVOCI 4,760,000
Cash 4,760,000
Note that unlike trading bond investment, transaction cost is included in the cost of financial asset measured at fair value
through OCL
Journal entry to record the annual interest received:

Cash ( 10% X 5,000,000) 500,000

Interest income 500,000
Interest income for bond investment measured at fair value through other comprehensive income must be
calculated using the effective interest method.

Accordingly, this would require amortization of any discount or premium on the bond investment.

Face amount 5,000,000

Acquisition 4,760,000
Discount 240,000
Amortization of Discount on December 31, 2021
Financial asset - FVOCI 71,200
Intey income 71,200

Date Interest
Received
Interest
Income
Discount
Amortization
Carrying
Amount

1/1/2021 4,760,000

12/31/2021 500,000 571,200 71,200 4,831,200

12/31/2022 500,000 579,744 79,744 4,910,944

12/31/2023 500,000 589,056 89,056 5,000,000

 Explanation
Interest received equals face amount of P5,000,000 times the nominal rate of 10% or
P500,000.
Interest income equals carrying amount times the effective rate.

Thus, on December 31, 2021 P4.760,000 times 12% equals P571,200 and so on.
Discount amortization equals interest income minus interest received.

Thus, for 2021, P571,200 minus P500,000 equals P71,200 and so on.
Carrying amount equals preceding carrying amount plus
discount amortization.

Thus, on December 31, 2021, P4,760,000 plus P71,200 equals P4,831,200 and so on.
Measurement at fair value
On December 31, 2021, the bond investment is measured at fair value through other comprehensive income.

The bonds are quoted at 102 on December 31, 2021.

Market value December 31, 2021 (5,000,000 x 102 %)

Carrying amount - December 31, 2021 per table 5,100,000
Unrealized gain for 2021-OCI
4,831,200
Financial asset - FVOCI 268,800
Unrealized gain - OCI 268,800
268,800

Subsequently, the entity must record discount amortization of P79,744 for 2022 and P89,056 for 2023 in
accordance with the effective interest table of amortization regardless of the change in market value.
The resulting carrying amount should then be adjusted to conform with the market value on December 31,
2022 and 2023.
Continuition of the illustration
The market value of the bonds on December 31, 2022 is 105 and the bonds are sold on June 30, 2023 at 110 plus
accrued interest.

Journal entries for 2022

1. To record the interest received:

Cash 500,000
Interest Income (10% X 5,000,000 500,000

2. To record the discount amortization:

Finany asset - FVOCI 79,744

Interest income 79,744

3. To record the change in market value:

Financial asset - FVOCI 70,256

Unrealized gain - OCI 70,256
Market value-December 31, 2022 (5,000,000 x 105) 5,250,000
Investment balance-December 31, 2022 per book
(5,100,000 79,744) (5,179,744)
Increase in unrealized gain for 2022 70,256
Another computation

Market value-December 31, 2022 5,250,000

Carrying amount per table - December 31, 2022
(See previous computation) (4,910,944)
Cumulative unrealized gain-December 31, 2022 339,056
Unrealized gain-December 31, 2021 (268,800)
Increase in unrealized gain for 2022 70,256
 Journal entries for 2023

1. To record the discount amortization from January 1 to June 30, 2023:

Financial asset - FVOCI 44,528
Interest income ( 89,056 X 6/12) 44,528

2. To record the sale of bonds on June 30, 2023:

Cash 5,750,000
Unrealized Gain - OCI 339,056
Financial asset - FVOCI 5,294,528
Gain on sale of financial asset 544,528
Interest income 250,000
Sale price (5,000,000 x 110) 5,500,000
Cumulative unrealized gain-OCI December 31, 2022 339,056
Total 5,839,056
Investment balance per book-June 30, 2023
(5,250,000+ 44,528) 5,294,528
Gain on sale of financial asset 544,528
 Another computation

Sale price 5,500,000

Carrying amount per table - June 30, 2023
(4,910,944+44.528) (4,955,472)
Gain on sale of financial asset 544,528

Sale price 5,500,000

Interest accrued from January 1 to June 30, 2023
(5,000,000 x 10 % x 6/12) 250,000
Total cash received 5,750,000
 Fair value option
An entity at initial recognition may
irrevocably designate a financial Under the fair value
asset as measured at fair value option, all changes in
through profit or loss even if the fair value are
financial asset satisfies the amortized recognized in profit or
cost or FVOCI measurement. loss. Accordingly, any
transaction cost
incurred is an outright
Investments in bonds can expense.
be designated without
revocation as measured at The interest income is based
fair value through profit on the nominal interest rate
or loss even if the bonds
are held for collection as a
rather than the effective
business model. interest rate.
 Illustration
On January 1, 2021, an entity
The stated purchased bonds with face amount of
P5,000,000 for P5,400,000 plus
interest rate is broker commission On December
8% payable of P100,000. 31, 2021, the
annually bonds had a
every fair value of
December 31 P5,600,000.
with an
effective rate
of 6%.
02 01 03
 Journal entries for 2021

1. Financial asset - FVPL 5,400,000

Commission expense 100,000
Cash 5,500,000

2. Cash ( 8% X 5,000,000 400,000

Interest income 400,000

3. Financial asset - FVPL 200,000

Gain from change in fair value 200,000
( 5,600,000 - 5, 400,000)
 MARKET PRICE OF BONDS
The market price of bonds is equal to the present
value of the principal plus the present value of
future interest payments using the effective rate.

Illustration 1 - Discount
Face amount of bonds P3,000,000
Date of issue of bonds January 1, 2021
Nominal rate 6%
Effective rate 8%
Interest payable annually December 31
Date of maturity December 31, 2023
The present value of an ordinary annity of 1 is determined for the number of interest periods using the effective
rate.

Since the life of the bonds is three years and the interest is payable annually, the number of interest periods is
three.
The relevant present value factors are:

PV of an ordinary annuity of 1 at 8% for three periods 2.58

PV of 1 at 8% for three periods 0.79
PV of principal (3,000,000 x .79) 2,370,000
PV of future interest payments (180,000 x 2.58) 464,400
Market price of bonds 2,834,400

Annual nominal interest payment (6% x 3,000,000) 180,000

The effective interest rate is higher than the nominal interest rate.
Thus, the difference between the face amount and present value is a discount.
Face amount 3,000,000
Present value or market price of bonds 2,834,400
Discount 165,600
Illustration 2- Premium
Face amount of bonds P3,000,000
Date of issue January 1, 2021
Nominal rate 8%
Effective rate 6%
Semiannual interest June 30 and December 31
Date of maturity December 31, 2022
The present value of an ordinary annuity of 1 is determined for the number of interest periods using the effective
rate.
Since the life of the bonds is 2 years and the interest is payable semiannually, the number of interest periods is four.
The annual effective rate is 6% or a semiannual effective of 3%.

The relevant present value factors are:

PV of an ordinary annuity of 1 at 3% for four periods 3.72

PV of 1 at 3% for four periods 0.89

The market price of bonds is equal to the present value of the principal plus the
present value of future interest payments using the effective rate.
PV of principal (3,000,000 x .0.89) 2,670,000
PV of future interest payments (120,000 x 3,72) 446,400
Market price of bonds 3,116,400

Semiannual nominal interest payment (4% x 3,000,000) 120,000

The effective interest rate is lower than the nominal interest rate.

Thus, the difference between the face amount and present value is a premium.

Face amount
Present value or market price of bonds
Premium
 Market price of serial bonds
Face amount 6,000,000
Annual installment every December 31 2,000,000
Date of issue January 1, 2021
Nominal interest rate payable annually every December 3 12%
Effective interest rate 14%
Present value of 1 at 14%
One period 0.877
Two period 0.770
Three period 0.675
The simple approach is to compute the present value of the annual cash
flows from the bonds.
Principal due on December 31, 2021 2,000,000
Interest received on 12/31/2021 (6,000,000 x 12%) 720,000

Total cash flows-December 31, 2021 2,720,000

Principal due on December 31, 2022 2,000,000

Interest received on 12/31/2022 (4,000,000*12\%) 480,000

Total cash flows-December 31, 2022. 2,480,000

Principal due on December 31, 2023 2,000,000

Interest received on 12/31/2023 ( 2,000,000*12\%) 240,000

Total cash flows-December 31, 2023 2240,000

The market price of the bonds is equal to the present value of the principal plus the
present value of future interest payments using the effective rate.
The market price of the serial bonds is computed by multiplying the total cash
flows every December 31 by the relevant present value factor.

December 31, 2021 (2,720,000 X .877) 2,385,440

December 31, 2022 ( 2,480,000 X .770) 1,909,600
December 31, 2023 (2,240,000 X .675) 1,512,000

Market price of serial bonds 5,807,040

Thank you for listening
John Warren L Mestiola BSA 1