FV @AC (Bond Investment) PDF

Preview

Summary

FINANCIAL ASSET AT AMORTIZED COST : Bond InvestmentA bond is a formal unconditional promise made under seal to pay a specified sum of money at a determinable future date.An investor acquires a bond either as a temporary or permanent investment and derives regular income in the form of interest.Initi...

Description

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 FINANCIAL ASSET AT AMORTIZED COST : Bond Investment A bond is a formal unconditional promise made under seal to pay a specified sum of money at a determinable future date. An investor acquires a bond either as a temporary or permanent investment and derives regular income in the form of interest. Initial measurement: Fair value plus transaction cost (FVOCI & AC) Fair value (FVPL) Subsequent measurement: 1. At fair value through PROFIT OR LOSS 2. At AMORTIZED COST 3. At fair value through OTHER COMPREHENSIVE INCOME 2 APPROACHES TO RECORD ACQUISITION OF BOND EXAMPLE: An entity acquired 12% bonds with face amount of 2,000,000 for 2,200,000 which includes ACCRUED INTEREST OF 20,000. The bonds are held for trading. 1. Acquisition 1. Acquisition Trading Securities 2,180,000 Trading Securities 2,180,000 ACCRUED INTEREST RECEIVABLE 20,000 INTEREST INCOME 20,000 Cash 2,200,000 Cash 2,200,000 2. Received semiannual interest 2. Received semiannual interest Cash 120,000 Cash 120,000 ACCRUED INTEREST RECEIVABLE 20,000 Interest Income 120,000 Interest Income 100,000 *MORE CONVENIENT AND WILL BE FOLLOWED FOR ILLUSTRATIONS BELOW. 1. AT FAIR VALUE THROUGH PROFIT OR LOSS April 1 Purchased 1,000,000 12% bonds at 96 plus accrued interest. Interest is payable January 1 and July 1. The bonds are held as trading investment. Trading Securities Interest Income Cash

*TS = 1M x 96% = 960T *II = 1M x 12% x 3/12 = 30T

960,000 30,000

Jan. 1 to April 1 = 3 mos

990,000

July 1 Received semiannual Interest. Cash

60,000 Interest Income

60,000

*1M x 12% = 120T * 120T/2 = 60T

Oct. 31 Sold 600,000 face value bonds for 101 plus accrued interest. Cash

630,000 Trading Securities 576,000 Interest Income 24,000 Gain on sale of TS 30,000

*Sale Price (600T x 101) Accrued Interest fr. July 1 to Oct. 31 (600T x 12% x 4/12) 24T TOTAL CASH RECEIVED *Sale Price 606T

606T

630T

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 Dec. 31 Accrued interest from July 1 to Dec. 31 on the remaining bonds of 400,000. Accrued Interest Receivable Interest Income

24,000 24,000

*400T x 12% x 6/12 = 24T July 1 to Dec 31 = 6 mos

Dec. 31 The bonds quoted at 120 at the end of the year Trading Securities 96,000 Unrealized Gain-TS 96,000

*Market Value (400T x 120) CA of remaining bonds (960T – 576,000) Unrealized gain

480T (384T) 96T

NOTE: When bond investment is measured at FVPL, it is not necessary to amortize any premium or discount.

2. 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 amount outstanding . • Investment (Repayments) Amortization of discount (Amortization of Premium) (Reduction for impairment/uncollectibility) AMORTIZED COST • Bond investments are classified as noncurrent investments • AMORTIZATION OF PREMIUM/DISCOUNT – it is amortized over the life of the bonds (from the date of acquisition to the date of maturity) a. Amortization of BOND DISCOUNT: Investment in Bonds xx Interest Income xx

b. Amortization of BOND PREMIUM: Interest Income xx Investment in Bonds xx

NOTE: Amortization may be 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 of amortization a. It is to bring the carrying amount of the investment to face amount on the date of maturity. b. The bondholder is the creditor. c. Bond premium is a loss on the part of the bondholder because he paid more than what can be collected on the date of maturity (offset / deduction to interest income) d. Bond discount is a gain on the part of the bondholder because he paid less than what can be collected on the date of maturity (addition to interest income) e. Such loss and gain are not recognized outright but allocated over the life of the bonds.

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19

Acquisition ON interest date

Jan.

Feb.

March

April

May

June

Semiannual Interest Payment date

July

Aug.

Sep.

Oct.

Nov.

Dec

Acquisition date

2019 April 1 Purchased 1,000,000 face amount 12% bonds at 94. Bonds pay interest semiannually April 1 and October 1 and mature on April 1, 2024. Investment in Bonds Cash

940,000 940,000

*1M x 94% = 940T

60,000

*1M x 12% x 6/12 = 60T May 1 to Oct. 1

Oct. 1 Received semiannual interest Cash

60,000 Interest Income

Dec. 31 Adjustment for accrued interest. Accrued Interest Receivable Interest Income

30,000 30,000

*1M x 12% x 3/12 = 30T Nov. 1 to Dec. 31

9,000

*Face amount Cost Discount

Dec. 31 Amortization of the bond discount Investment in Bonds Interest Income

9,000

1M (940T) 60T

Annual amortization (60T/5 years)

12T

Amortization for 9 mos (12T x 9/12)

9T

May 1 to Dec. 31

2020 Jan 1 Reversal of the adjustment for accrued interest. Interest Income 30,000 Accrued Interest Receivable April 1 Received semiannual interest Cash

60,000 Interest Income

60,000

30,000

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 Oct. 1 Received semiannual interest Cash

60,000 Interest Income

60,000

Dec. 31 Adjustment for accrued interest Accrued Interest Receivable Interest Income

30,000 30,000

Dec. 31 Adjustment for amortization of bond discount Investment in Bonds Interest Income

12,000

*Face amount Cost Discount

12,000

1M (940T) 60T 12T

Annual amortization (60T/5 years)

April Dec. Dec. Dec. Dec. Dec. April

Investment in Bonds 940,000 Balance, April 1,2024 9,000 12,000 12,000 12,000 12,000 3,000 1,000,000

1, 2019 cost 21, 2019 amrtn 21, 2020 amrtn 21, 2021 amrtn 21, 2022 amrtn 21, 2023 amrtn 1, 2024 amrtn

1,000,000

1,000,000

Redemption of the bonds Cash

1,000,000 Investment in Bonds 1,000,000

Acquisition BETWEEN interest date

Jan.

Feb.

March

April

May

Semiannual Interest Payment date

June

July

Aug.

Acquisition date

Sep.

Oct.

Nov.

Dec

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 2020 Feb. 1 Purchased 12% 1,000,000 face amount bonds at 105 plus accrued interest on February 1,2020. Interest is payable semiannually on April 1 and October 1. Bonds are dated April 1, 2019 and mature on April 1, 2024: Investment in Bonds Interest Income Cash

1,050,000 40,000 1,090,000

*Cost (1M x 105) Accrued Interest fr Oct. 1, 2019 to Feb. 1 2020 (1M x 12% x 4/12) Total cash paid

1,050,000 40T 1,090,000

April 1 Received semiannual interest Cash

60,000

*1M x 12% = 120T *120T/2 = 60T

60,000

*1M x 12% = 120T *120T/2 = 60T

60,000 Interest Income

Oct. 1 Received semiannual interest Cash

60,000 Interest Income

Dec. 31 Adjustment for accrued interest Accrued Interest Receivable Interest Income

30,000 30,000

*1M x 12% = 120T *120T x 3/12 = 30T

Dec. 31 Adjustment for the amortization of the bond premium Interest Income Investment in Bonds

February 1, 2020

11,000 11,000

Investment in Bonds 1,050,000 Dec. 31, 2020 amrtn Dec. 31, 2021 amrtn Dec. 31, 2022 amrtn Dec. 31, 2023 amrtn April 1, 2024 amrtn Balance April 1,050,000

Redemption of the bonds Cash

*Life of bonds = fr. Feb. 1, 2020 to April 1, 2024 *Monthly amortization (50T/ 50) Feb 1 to Dec. 31 (11 mos x 1,000)

1,000,000 Investment in Bonds 1,000,000

50 mos 1,000 11,000

11,000 12,000 12,000 12,000 3,000

1,000,000

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 •

Sale of bonds prior to maturity a. Amortization of the premium or discount should be recognized up to the date of sale b. If sale is BETWEEN interest dates, the sale price normally includes the accrued interest. Sale price (deduct accrued interest) ( Carrying Amount) Gain or loss

Jan

Feb

March

April

May

June

Semiannual Interest Payment date

July

Aug.

Sep.

Oct.

Nov.

Dec.

Acquisition date

2019 Aug. 1 Purchased 12% 1,000,000 face amount bonds for 1,075,000 including accrued interest. Interest is payable semiannually May 1 and November 1. Bonds are dated May 1,2019 and mature May 1,2023. Investment in Bonds Interest Income Cash

Nov. 1

1,045,000 30,000 1,075,000

1,075,000 (30T) 1,045,000

Received semiannual interest

Cash

60,000 Interest Income

Dec. 31

*Total cash paid Accrued Interest fr May 1 to Aug. 1 2019 (1M x 12% x 3/12) Total cash paid

*1M x 12% = 120T *120T/2 = 60T

60,000

Adjusting for accrued interest

Accrued Interest Receivable Interest Income

20,000 20,000

*1M x 12% = 120T *120T x 2/12 = 20T

Dec. 31 Adjustment for amortization of premium Interest Income Investment in Bonds

5,000 5,000

*Life of bonds = fr. Aug. 1, 2019 to May 1, 2023 *Monthly amortization (45T/ 45) Aug 1 to Dec. 31 2019 (5 mos x 1,000)

45 mos 1,000 5,000

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 Sale of bonds 2021 Feb. 1 Bonds were sold at 108 plus accrued interest. *Sale Price Accrued Interest fr. Now. 1, 2020 a. Cash

1,110,000 Investment in Bonds 1,027,000 Interest Income 30,000 Gain on Sale of BI 53,000

1,080,000

to Feb 1, 2021 (1M x 12% x 3/12) Total cash received Original cost Amort. fr. Aug. 1,2019 to Feb. 1,2021 Or 18 mos x 1,000 CA of bonds on Feb. 1,2021 Sale price Gain on sale

30,000 1,110,000 1,045,000 (18,000) 1,027,000 (1,080,000) 53,000

b. to update the a,ortization of the premium up to the date of sale, Feb. 1,2021. Presumably, the last amortization was dec. 31,2020 Interest Income 1,000 Investment in Bonds 1,000

•

• • •

* 1 month x 1,000 = 1,000

Collable 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 is at a premium or more than the face amount of the bonds - Redemption Price (CA of bond) PROFIT or LOSS Convertible Bonds – those which give the bondholders the right to exchange their bonds for share capital Serial Bonds – which have a series of maturity dates or those bonds payable in installments Term Bonds – bonds that mature on a single date (e.g., Callable bonds, and convertible bonds)

METHODS OF AMORTIZATION A. Straight line method – provides for an equal amount of premium or discount amortization each accounting priod B. Bond outstanding method – applicable to serial bonds and provides for a decreasing amount of amortization. C. Effective interest method/interest method/scientific method – provides for an increasing amount of amortization. NOTE: According to PFRS 9, bond investment shall be classified as FA measured at AC using the effective interest method.

Face amount of bonds Acquisition cost on Jan 1,2019 Discount on the bonds Date of bonds

STRAIGHT LINE METHOD - DISCOUNT 2,000,000 (1,850,000) 2019 150,000 2020 Jan. 1,2019 2021 Total bond discount

50T 50T 50T 150T

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 Date of maturity Jan. 1,2022 Interest payable semiannually on June 30 and Dec. 31 12% 2019 Jan 1 Acquisition Investment in bonds Cash

1,850,000 1,850,000

June 30 Collection of semiannual interest Cash

120,000 Interest Income

120,000

* 2M x 12% x 6/12 = 120,000

Dec. 31 Collection of semiannual interest Cash

120,000 Interest Income

120,000

Dec. 31 Annual amortization of discount Investment in Bonds Interest Income

50,000 50,000

Face amount of bonds Acquisition cost on Jan 1,2019 Premium on the bonds Date of bonds Date of maturity Interest payable annually on June 30 and Dec. 31 2019 Jan 1 Acquisition Investment in bonds Cash

STRAINGHT LINE METHOD - PREMIUM 2,000,000 2019 (2,200,000) 2020 200,000 2021 Jan. 1,2019 2022 Jan. 1,2023 Total bond premium 12%

2,200,000 2,200,000

50T 50T 50T 50T 200T

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 Dec. 31 Collection of annual interest Cash

240,000 Interest Income

* 2M x 12% = 240,000

240,000

Dec. 31 Annual amortization of premium Interest Income 50,000 Investment in Bonds 50,000

BOND OUTSTANDINGMETHOD – DISCOUNT Face amount of bonds 2,000,000 Acquisition cost on Jan. 1,2019 (1,900,000) Discount on the bonds 100,000 Annual installment on Dec. 31,2019 and every Dec. 31 thereafter 500,000 Date of bonds Jan. 1,2019 Interest payable semiannually on June 30 and Dec. 31 12% Year Bond outstanding Fraction Discount amortization 2019 2,000,000 20/50 40,000 2020 1,500,000 15/50 30,000 2021 1,000,000 10/50 20,000 2022 500,000 5/50 10,000 5,000,000 100,000 2019 Jan. 1

Investment in Cash

1,900,000 1,900,000

June 30 Cash

120,000 Interest Income Semiannual interest.

120,000

Dec. 31 Cash

120,000 Interest Income Semiannual interest.

120,000

* 2M x 12% x 6/12 = 120,000

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 Dec. 31 Investment in Bonds 40,000 Interest Income 40,000 Amortization of discount for 2019. Dec. 31 Cash

500,000 Investment in Bonds First installment.

500,000

2020 June 30 Cash

90,000 Interest Income Semiannual interest.

90,000

* 1.5M x 12% x 6/12 = 90,000

Dec. 31 Cash

90,000 Interest Income Semiannual interest.

90,000

Dec. 31 Investment in Bonds 30,000 Interest Income 30,000 Amortization of discount for 2019. Dec. 31 Cash

500,000 Investment in Bonds Second installment.

500,000

BOND OUTSTANDING METHOD - PREMIUM

INTERMEDIATE ACCOUNTING VOL. 1 VALIX: CHAPTER 19 Face amount of bonds 4,000,000 Acquisition cost on Jan. 1,2019 (4,200,000) Premium on the bonds 200,000 Annual installment on Dec. 31,2019 and every Dec. 31 thereafter 1,000,000 Date of bonds Jan. 1,2019 Interest payable annually on June 30 and Dec. 31 12% Year Bond outstanding Fraction Discount amortization 2019 4,000,000 4/10 80,000 2020 3,000,000 3/10 60,000 2021 2,000,000 2/10 40,000 2022 1,000,000 1/10 20,000 10,000,000 200,000 2019 Jan. 1 Investment in Cash

4,200,000 4,200,000

Dec. 31 Cash

480,000 Interest Income Annual interest.

480,000

Dec. 31 Interest Income 80,000 Investment in Bonds 80,000 Amortization of premium for 2019. Dec. 31 Cash

1,000,000 Investment in Bonds First installment.

1,000,000

* 4M x 12% = 480,000...