Investment in Debt Securities Flashcards
Investment in Debt Securities
A__ is a contract whereby one party called the issuer borrows fund from another party called the bondholder or investor. In exchange, the issuer pays interest to the bondholder periodically.
Bond
A bond is a debt security because the bondholder is a creditor and the issuer is a debtor
A bond is issued in small denominations such as P100, P1000 or P10,000 to allow more investors to purchase the bond. For example, P5M bond issue could be issued in P1k denominations. As a result, there will be 50,000 bonds with a face value of P1,000 each.
Investment in Debt Securities
Again, diba may 3 Classification sa Investment in Securities?
1. FVPL
2. FVOCI
3. FAC
Then yung pwede lang ma classify as FAC ay Debt Securities (hindi equity securities), PERO ANG DEBT SECURITIES AS PWEDE DIN MA CLASSIFY AS FVPL, OR FVOCI (like equity securities). Dahil dito sa business model test:
1. The buisness model is to hold the financial asset in order to collect contractual cash flows on specified dates
2. The contractual cash flows are solely payments of principal and interest on the principal amount outsanding
At an usual na example na Debt Securities ay Bonds.
Investment in Debt Securities
Explain the FAC
1. Initial Measurement
2. Subsequent Measurement
- Initial Measurement
Fair Value Plus Transaction Cost (like FVOCI)
-Which is the FV is equal to PV or Acquisition Cost - Subsequent Measurement
Amortized Cost
Investment in Debt Securities
Explain 6 type of bonds:
1. Term Bonds
2. Serial Bonds
3. Coupon Bonds
4. Zero-coupon bonds
5. Callable bonds
6. Convertible Bonds
- bonds that mature on a single date
- bond that mature in installments
- bonds with a detachable coupon for each interest payment that can be freely transferred
- bonds that do not pay periodic interests. However, they sell at significant discount to their face amount. The principal and compounded interest are due at maturity
- bonds will call provision that give the issuer the right to redeem the bonds before their maturity date. If the interest rates decline, the issuer can call high-interest bonds and replace them with low interest bonds
- bonds with the option for the holder to exchange the bonds for shares of the stocks of the issuer
Investment in Debt Securities
Explain:
Discount
Premium
- Acquisition Cost vs. Face Amount
- Effective Interest Rate vs. Nominal Rate
Discount
-Acquisition Cost is less than face amount
-Effective interest rate is higher than nominal rate
Premium
-Acquisition Cost is more than face amount
-Effective interest rate is lower than nominal
Investment in Debt Securities
So in computing effective interest method (Amortization), how to compute:
- Interest Income
- Interest Receivable
- What is the difference?
- Interest Income
=PV x Effective Interest Rate - Interest Receivable
=Face Amount x Nominal Rate - Amortization = Interest Income - Interest Receivable.
-Which will add or deduct on the PV, depending if with discount or premium
-Basta regardless, the carrying amount of the bonds should be equal to the face amount
-So when the bonds are settled, the investment account is simply credited at face amount equal to the cash received for the principal
Investment in Debt Securities
If Bonds were acquired in between interest payment dates, explain:
- Pano gagawin sa Accrued Interest Income. Not held by investor (Interest na kasama na sa bonds o interest ng seller/ purchased interest)
- a. Initial entry upon buying?
b. upon receipt of interest?
- -Should not recognized as interest income!
-This is debited to Interest Receivable or Inetrest Income
-Does not affect the acquisition cost. THE AMOUNT DEBITED TO THE INVESTMENT ACCOUNT SHOULD EXCLUDES THE PURCHASED INTEREST
2.
a)
Dr. Investment in Bonds
Dr. Interest Receivable
Cr. Cash
b)
Dr. Cash
Cr. Interest Receivable (yung not held by investor)
Cr. Interest Income (yung held by investor)
Investment in Debt Securities
Explain when bonds are sold prior to maturity in between interest payment dates:
- How to compute recognized gain or loss? formula?
- Treatment on the accrued interest?
- How to treat commissions fees or paid on sale?
- Entry?
1, 2 and 3.
Sale Price xx
Less: Commision paid on sale
Less: Accrued Interest (if included in the sales price)
=Net Proceeds xx
Less: Carrying Amount xx
=Realized Gain or Loss
-if the bonds are sold in between the interest payment dates, the sales price normally includes the accrued interest.
-The Accrued interest should be recognized as Interest Income and not included in the gain or loss on the sale!
- So may dalawang entry, i update mo muna yung Amortization or recognized income (be keen on the dates kung gang saan lang yung interest);
A)
Dr. Interest Receivable
Dr. or Cr. Investment in Bonds (Amortization)
Cr. Interest Income
B)
Dr. Cash
Cr Investment In bonds
Cr. Interest Receivable
Cr. Gain on Sale!
Investment in Debt Securities
If the Investment in Bonds is Serial Bonds
- Define
- Important step prior to compute Amortization Table
- How to compute the current and non current portion of the investment?
- Serial bonds are bonds with series of maturity dates. The periodic collections on serial bonds include both interest and principal
- Compute the Future Cash Flows form the serial bonds (Periodic collection including Interest). Need yan para Ilatag malatag mo yung amortization table:
Darte/Collection/InterestIncome/ Amortization/ Present Value. (Collection is equal to principal payment and interest) - Alam mo na yan basta malatag lang yung Amortization table haha
Investment in Debt Securities
Notes of Reclassification:
*PFRS 9 provides that an entity shall reclassify financial assets only when it changes its business model for managing the financial assets (e.g. FVPL - trading/buy and sell; FVOCI - hold to collect and sell; FAC - hold to collect)
*“Reclassification date” is the first day of the reporting period following the change in business model that results in an entity classifying financial asset
*Transfer from investments at FVPL or FVOCI to FAC are allowed. The FV on the date of the transfer shall be the investment’s deemed cost
- For transfer as FAC, the prevailing effective interest rate on the date of the transfer shall also become deemed effective rate
*The difference between the current fair value and carrying amount before transfer is recognized in profit or loss
That’s all. Thank you!
