PRE-REV: INVESTMENT IN

ASSOCIATES/ FA AT AMORTIZED
COST
INVESTMENT IN ASSOCIATE
Key Definitions
• Associate- Is an entity, including an unincorporated entity such as
a partnership, over which the investor has significant influence
and that is neither a subsidiary nor an interest in a joint venture.

• Significant influence - Is the power to participate in the financial

and operating policy decisions of the investee but is not control or
joint control over those policies.

• Equity method - Is a method of accounting whereby the

investment is initially recognized at cost and adjusted thereafter
for the post acquisition change in the investor’s share of net
assets of the investee. The profit or loss of the investor includes
the investor's share of the profit or loss of the investee.
MCQ- Theory 1
1. It is an entity, including an unincorporated
entity such as a partnership over which the
investor has significant influence and that is
neither a subsidiary nor an interest in joint
venture.
a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund
MCQ- Theory 1
1. It is an entity, including an unincorporated
entity such as a partnership over which the
investor has significant influence and that is
neither a subsidiary nor an interest in joint
venture.
a. Associate
b. Investee
c. Venture capital organization
d. Mutual fund
MCQ- Theory 2
2. Which of the following statements best describes
the term “significant influence”?
a. The holding of a significant proportion of the share
capital in another entity.
b. The contractually agreed sharing of control over an
economic entity.
c. The power to participate in the financial and operating
policy decisions of an entity.
d. The mutual sharing in the risks and benefits of a
combined entity.
MCQ- Theory 2
2. Which of the following statements best describes
the term “significant influence”?
a. The holding of a significant proportion of the share
capital in another entity.
b. The contractually agreed sharing of control over an
economic entity.
c. The power to participate in the financial and operating
policy decisions of an entity.
d. The mutual sharing in the risks and benefits of a
combined entity.
MCQ- Theory 3
3. Which statement is incorrect concerning the
equity method?
a. The investment in associate is initially recorded at cost.
b. The investment in associate is increased or decreased
by the investor’s share of the profit or loss of the
investee after the date of acquisition.
c. The investor’s share of the profit or loss of the investee
is not recognized in the investor’s profit or loss.
d. Distributions received from the investee reduce the
carrying amount of the investment.
MCQ- Theory 3
3. Which statement is incorrect concerning the
equity method?
a. The investment in associate is initially recorded at cost.
b. The investment in associate is increased or decreased
by the investor’s share of the profit or loss of the
investee after the date of acquisition.
c. The investor’s share of the profit or loss of the investee
is not recognized in the investor’s profit or loss.
d. Distributions received from the investee reduce the
carrying amount of the investment.
Identification of Associates
• A holding of 20% or more of the voting power
(directly or through subsidiaries) will indicate
significant influence unless it can be clearly
demonstrated otherwise.
• If the holding is less than 20%, the investor will be
presumed not to have significant influence unless
such influence can be clearly demonstrated.
 MCQ- Theory 4
4. Which statement is incorrect concerning significant influence?
I. If an investor holds directly or indirectly, less than 20% of the voting
power of the investee, it is presumed that the investor does not have
significant influence, unless such influence can be clearly demonstrated.
II. If an investor holds, directly or indirectly, 20% or more of the voting
power of the investee, it is presumed that the investor does not have
significant influence, unless it can be clearly demonstrated that this is
not the case.
III. A substantial or majority ownership by another entity does not
necessarily preclude an investor from having significant influence.
a. I, II and III
b. I and II only
c. III only
d. II only
 MCQ- Theory 4
4. Which statement is incorrect concerning significant influence?
I. If an investor holds directly or indirectly, less than 20% of the voting
power of the investee, it is presumed that the investor does not have
significant influence, unless such influence can be clearly demonstrated.
II. If an investor holds, directly or indirectly, 20% or more of the voting
power of the investee, it is presumed that the investor does not have
significant influence, unless it can be clearly demonstrated that this is
not the case.
III. A substantial or majority ownership by another entity does not
necessarily preclude an investor from having significant influence.
a. I, II and III
b. I and II only
c. III only
d. II only
Accounting for Associates
In its consolidated financial statements, an investor
should use the equity method of accounting for
investments in associates, unless:
• An investment in an associate that is acquired and
held exclusively with a view to its disposal within 12
months from acquisition should be accounted for
as held for trading under PFRS 9 (FVPL).
• A parent that is exempted from preparing
consolidated financial statements by PAS 27 may
prepare separate financial statements as its
primary financial statements. Use cost method or
PFRS 9.
Accounting for Associates
• An investor need not use the equity method if all of the
following four conditions are met:
1. The investor is itself a wholly owned subsidiary, or is a
partially-owned subsidiary of another entity and its other
owners, including those not otherwise entitled to vote,
have been informed about, and do not object to, the
investor not applying the equity method;
2. The investor's debt or equity instruments are not traded in a
public market;
3. The investor did not file, nor is it in the process of filing, its
financial statements with a securities commission or other
regulatory organization for the purpose of issuing any class of
instruments in a public market; and
4. The ultimate or any intermediate parent of the investor
produces consolidated financial statements available for public
use that comply with PFRS.
Applying the Equity Method of
Accounting
1. Basic principle – The equity investment is initially
recorded at cost and is subsequently adjusted to reflect the
investor's share of the net profit or loss of the associate.
2. Distributions and other adjustments to carrying amount -
Distributions received from the investee reduce the carrying
amount of the investment. Adjustments to the carrying
amount may also be required arising from OTHER changes
in the investee's equity (revaluation surplus and translation
gains and losses.)
3. An associate with outstanding preference shares
a. The investor computes its share of profits or losses after adjusting
for the dividends on such shares, whether or not the dividends
have been declared on cumulative preference shares.
b. However if the preference shares is non-cumulative, adjustments
for dividends are made only if there is a declaration.
MCQ-Theory 5
5. An investor uses the equity method to account for an
investment in ordinary shares. After the date of
acquisition, the investment account of the investor
would.
a. Not be affected by its share of the earnings or losses of the
investee
b. Not be affected by its share of earnings of the investee, but
be decreased by its share of the losses of the investee
c. Be increased by its share of the earnings of the investee, but
not be affected by its share of the losses of the investee.
d. Be increased by its share of the earnings of the investee, and
decreased by its share of the losses of the investee
MCQ-Theory 5
5. An investor uses the equity method to account for an
investment in ordinary shares. After the date of
acquisition, the investment account of the investor
would.
a. Not be affected by its share of the earnings or losses of the
investee
b. Not be affected by its share of earnings of the investee, but
be decreased by its share of the losses of the investee
c. Be increased by its share of the earnings of the investee, but
not be affected by its share of the losses of the investee.
d. Be increased by its share of the earnings of the investee, and
decreased by its share of the losses of the investee
MCQ-Theory 6
6. If an associate has outstanding cumulative
preference share, held by outside interests, the
investor computes its share of profits or losses
a. After adjusting for preference dividends which were
actually paid during the year.
b. Without regard for preference dividends.
c. After adjusting for the preference dividends only when
declared.
d. After adjusting for the preference dividends, whether or
not the dividends have been declared.
MCQ-Theory 6
6. If an associate has outstanding cumulative
preference share, held by outside interests, the
investor computes its share of profits or losses
a. After adjusting for preference dividends which were
actually paid during the year.
b. Without regard for preference dividends.
c. After adjusting for the preference dividends only when
declared.
d. After adjusting for the preference dividends, whether or
not the dividends have been declared.
MCQ-Theory 7
7. Under the equity method of accounting for
investments, an investor recognizes its share of
the earnings in the period in which the
a. Investor sells the investment
b. Investee declares a dividend
c. Investee pays dividend
d. Earnings are reported by the investee in its
financial statements
MCQ-Theory 7
7. Under the equity method of accounting for
investments, an investor recognizes its share of
the earnings in the period in which the
a. Investor sells the investment
b. Investee declares a dividend
c. Investee pays dividend
d. Earnings are reported by the investee in its
financial statements
MCQ-Theory 8
8. When an investor uses the equity method to
account for investment in ordinary shares, cash
dividends received by the investor from the investee
shall be recorded as
a. Dividend income
b. A deduction from the investor’s share of the investee’s
profits
c. A deduction from the investment account
d. A deduction from the shareholders’ equity account,
dividends to shareholder.
MCQ-Theory 8
8. When an investor uses the equity method to
account for investment in ordinary shares, cash
dividends received by the investor from the investee
shall be recorded as
a. Dividend income
b. A deduction from the investor’s share of the investee’s
profits
c. A deduction from the investment account
d. A deduction from the shareholders’ equity account,
dividends to shareholder.
MCQ-Theory 9
9. When an investor uses the equity method to account
for investment in ordinary shares, the investment
account will be increased when the investor recognizes
a. A proportionate interest in the net income of the investee
b. A cash dividend received from the investee
c. Periodic amortization of the goodwill related to the purchase
d. Depreciation related to the excess of market value over
carrying amount of the investee’s depreciable assets at the
date of purchase by the investor
MCQ-Theory 9
9. When an investor uses the equity method to account
for investment in ordinary shares, the investment
account will be increased when the investor recognizes
a. A proportionate interest in the net income of the investee
b. A cash dividend received from the investee
c. Periodic amortization of the goodwill related to the purchase
d. Depreciation related to the excess of market value over
carrying amount of the investee’s depreciable assets at the
date of purchase by the investor
4. Implicit goodwill and fair value adjustments - On
acquisition of the investment any difference between the
cost of the investment and the investor’s share of the net
fair value of the associate’s identifiable assets, liabilities
and contingent liabilities is accounted for in accordance
with PFRS 3 Business Combinations. Therefore:

(a) Goodwill relating to an associate is included in the

carrying amount of the investment. However,
amortization of that goodwill is not permitted and
is therefore not included in the determination of the
investor’s share of the associate’s profits or losses.

(b) Any excess of the investor’s share of the net fair value
of the associate’s identifiable assets, liabilities and
contingent liabilities over the cost of the investment
MCQ-Theory 10
10. Goodwill arising from an investment in associate
is
a. Included in the carrying amount of the investment and
amortized over the useful life.
b. Included in the carrying amount of the investment and
not amortized.
c. Excluded from carrying amount of the investment but
charged to retained earnings.
d. Excluded from carrying amount of the investment but
charge to expense immediately.
MCQ-Theory 10
10. Goodwill arising from an investment in associate
is
a. Included in the carrying amount of the investment and
amortized over the useful life.
b. Included in the carrying amount of the investment and
not amortized.
c. Excluded from carrying amount of the investment but
charged to retained earnings.
d. Excluded from carrying amount of the investment but
charge to expense immediately.
MCQ-Theory 11
11. How is goodwill arising on the acquisition of
an associate dealt with in the financial
statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss
d. Goodwill is not recognized separately within the
carrying amount of the investment.
MCQ-Theory 11
11. How is goodwill arising on the acquisition of
an associate dealt with in the financial
statements?
a. It is amortized.
b. It is impairment tested individually.
c. It is written off against profit or loss
d. Goodwill is not recognized separately within the
carrying amount of the investment.
5. Appropriate adjustments to the investor's
share of the profits or losses after acquisition are
made to account for additional depreciation of
the associate's depreciable assets based on the
excess of their fair values over their carrying
amounts at the time the investment was
acquired. This rule also applies to inventories
since this will have an effect in the associate’s
reported net income.
MCQ-Theory 12
12. An investor uses the equity method to account
for investment in ordinary shares. The purchase
price implies a fair value of the investee’s
depreciable assets in excess of the investee’s net
carrying values. The investor’s amortization of the
excess
a. Decrease the investment account
b. Decrease the goodwill account
c. Increase the investment revenue account
d. Does not affect the investment account
MCQ-Theory 12
12. An investor uses the equity method to account
for investment in ordinary shares. The purchase
price implies a fair value of the investee’s
depreciable assets in excess of the investee’s net
carrying values. The investor’s amortization of the
excess
a. Decrease the investment account
b. Decrease the goodwill account
c. Increase the investment revenue account
d. Does not affect the investment account
 7. Discontinuing the equity method - Use
of the equity method should cease from the
date that significant influence ceases.
 The difference between the selling price and
carrying amount of the investment sold shall
be recognized in profit or loss.
 The “retained investment” shall be accounted
for under PFRS 9 and shall be remeasured to
fair value on the date significant influence
ceases and recognized in profit or loss.
MCQ Theory 13
13. When the investor discontinues the use of
the equity method because significant influence
is lost, the investment in associate retained by
the investor shall be measured at
a. Fair value
b. Carrying amount’
c. Amortized cost
d. Original cost
MCQ Theory 13
13. When the investor discontinues the use of
the equity method because significant influence
is lost, the investment in associate retained by
the investor shall be measured at
a. Fair value
b. Carrying amount’
c. Amortized cost
d. Original cost
 8. Application of the equity method achieved in
stages
 The previously held interest that was accounted for under
the cost or fair value method shall be remeasured to fair
value on the date the investor gains significant influence.
 The difference between the fair value and the carrying
amount of the previously held investment shall be
recognized in profit or loss.
 The total of the fair value of the previously held investment
and the new acquisition cost shall be regarded as the total
cost of the investment classified as “associate”.
 If the FVOCI was used to account for the previously held
investment, any cumulative unrealized gain or loss as OCI
shall be reclassified to retained earnings.
 9. Losses in excess of investment
 The investor’s share in the associates losses cannot
exceed the “interest in the associate” and shall
discontinue the application of the equity method is this
is the case.
 After the investor's interest is reduced to zero,
additional losses are recognized by a provision
(liability) only to the extent that the investor has
incurred legal or constructive obligations or made
payments on behalf of the associate.
 If the associate subsequently reports profits, the
investor resumes recognizing its share of those profits
only after its share of the profits equals the share of
losses not recognized.
MCQ Theory 14
14. If under the equity method, an investor’s share of losses
of an associate equals or exceeds the carrying amount of an
investment, which of the following is not correct?
a. The investor discontinues its share of further losses.
b. Additional losses are provided for, or a liability is recognized, to
the extent that the investor has incurred legal or constructive
obligations or made payments on behalf of the associate.
c. If the associate subsequently reports profits, the investor
resumes its share of those profits without regard to the share of
net losses not previously recognized.
d. The investment is reported at NIL value.
MCQ Theory 14
14. If under the equity method, an investor’s share of losses
of an associate equals or exceeds the carrying amount of an
investment, which of the following is not correct?
a. The investor discontinues its share of further losses.
b. Additional losses are provided for, or a liability is recognized, to
the extent that the investor has incurred legal or constructive
obligations or made payments on behalf of the associate.
c. If the associate subsequently reports profits, the investor
resumes its share of those profits without regard to the share of
net losses not previously recognized.
d. The investment is reported at NIL value.
 SAMPLE PROBLEM 1:
Investment in Associates
Problem 1
At the beginning of the current year, Cynosure Company purchased
40% of the ordinary shares of another entity for P 3,500,000. When
the net assets of the investee amounted to P 7,000,000. At
acquisition date, the carrying amounts of the identifiable assets and
liabilities of the investee were equal to their fair value, except for
equipment for which the fair value was P 1,500,000 greater than
carrying amount and inventory whose fair value was P 500,000
greater than cost.
The equipment has a remaining life of 4 years and the inventory
was all sold during the current year. The investee reported net
income of P 4,000,000 and paid P 1,000,000 dividends during the
current year.
Required:
1. Prepare journal entries for the relating to the investment for the
current year.
2. Compute for the investment income for the current year.
3. Compute for the carrying amount of the investment at year end.
Problem 1 (answer)
1. To record the investment:
Investment in associate 3,500,000
Cash 3,500,000
2. To record share in net income:
Investment in associate 3,500,000
Investment income (40%x4,000,000) 3,500,000
3. To record share in cash dividend:
Cash (40%x1,000,000) 400,000
Investment in associate 400,000
Computation:
Acquisition Cost P 3,500,000
CA of net asset acquired
(40%xP7,000,000) 2,800,000
Excess of cost over carrying amount 700,000
Excess attributable to equipment
(40%xP1,500,000) (600,000)
Excess attributable to inventory
(40%xP 500,000) (200,000)
Excess net fair value over cost (100,000)
Problem 1 (answer)
1. To record the investment:
Investment in associate 3,500,000
Cash 3,500,000
2. To record share in net income:
Investment in associate 3,500,000
Investment income (40%x4,000,000) 3,500,000
3. To record share in cash dividend:
Cash (40%x1,000,000) 400,000
Investment in associate 400,000

4. To record amortization of the excess attributable to the equipment

Investment income 150,000
Investment in associate 150,000
(600,000 / 4 years)
Problem 1 (answer)
5. To record the amortization of the excess attributable to inventory:
Investment income 200,000
Investment in associate 200,000

The excess is fully “expensed” because all the inventory was already sold
during the year.

6. To record the “excess net fair value” as investment income:

Investment in associate 100,000
Investment income 100,000
Determination of investment
income
Share in net income 1,600,000
Amortization of excess attributable to equipt. (150,000)
Amortization of excess attributable to inventory (200,000)
Excess net fair value 100,000
Net investment income 1,350,000
Carrying amount of the
investment at year end
Acquisition cost 3,500,000
Share in Net Income 1,600,000
Share in Cash Dividend (400,000)
Amortization of excess attributable to equipt. (150,000)
Amortization of excess attributable to inventory (200,000)
Excess net fair value 100,000
Investment in associate, end 4,450,000
 SAMPLE PROBLEM 2:
Investment in Associates
Problem 2
On January 1, 2016, Forensic Company acquired a 10%
interest in an investee for P 3,000,000. The investment was
accounted for a fair value through other comprehensive
income. The fair value of the investment was P 3,500,000 on
December 31, 2016 and P 4,500,000 on December 31, 2017.
On January 1, 2018 the entity acquired a further 15% interest
in the investee for P 6,750,000. On such date the carrying
amount of net assets of the investee was P 36,000,000. The
fair value of the net assets of the investee is equal to carrying
amount except for an equipment whose fair value exceeds
carrying amount by P 4,000,000. The equipment has a
remaining life of 5 years. The investee reported net income of
P 8,000,000 for 2018 and paid dividends of P 5,000,000 on
December 31, 2018. No dividends was paid in 2016 and 2017
by the investee.

Required:
1. Compute the goodwill on January 1,2018.
Problem 2 (answer)
Fair value of 10% existing interest 4,500,000
Cost of 15% new interest 6,750,000
Total cost of the investment 11,250,000
Carrying amount of net assets acquired
(25% x 36,000,000) 9,000,000
Excess of cost over carrying amount 2,250,000
Excess attributable to equipment
(25%xP4,000,000) (1,000,000)
Goodwill 1,250,000
 SAMPLE PROBLEM 3:
Investment in Associates
Problem 3
On January 1, 2016, Grand company acquired
30% of East Company’s voting stock for P
8,000,000. During 2016, East earned P
5,000,000 and paid dividends of P 2,000,000.
On January 1, 2017, Grand sold ½ of the
investment in East resulting to a loss of
significant influence. On January 1, 2017 the
investment is measured at fair value through
other profit or loss. The fair value of the retained
investment is P 5,000,000 on January 1, 2017.
Required:
Prepare journal entries for 2016 and 2017.
Problem 1 (answer)
1. To record the investment:
Investment in associate 8,000,000
Cash 8,000,000
2. To record share in net income:
Investment in associate 1,500,000
Investment income (30%x5,000,000) 1,500,000
3. To record share in cash dividend:
Cash (30%x2,000,000) 600,000
Investment in associate 600,000
Problem 1 (answer)
5. To record the sale of ½ of the investment:
Cash 8,000,000
Investment in associate 8,000,000

Acquisition cost 8,000,000

Share in Net Income 1,500,000
Share in Cash Dividend (600,000)
Carrying amount 1/1/2017 8,900,000
½ Sold on 1/1/2017 4,450,000
Remaining balance, 1/1/2017 4,450,000
Problem 1 (answer)
6. To remeasure the retained investment of 15%:
Investment in associate 550,000
Gain from remeasurement to FV 550,000

Fair value of retained investment 5,000,000

Carrying amount of retained investment 4,450,000
Gain from remeasurement 550,000

7. To reclassify the retained investment as financial

asset at fair value through profit or loss:
Financial asset – FVPL 5,000,000
Investment in associate 5,000,000
Financial Assets at Amortized Cost
Requisites for Classification
The asset is held to collect its contractual cash flows
and
The asset’s contractual cash flows represent ‘solely
payments of principal and interest’
Financial Assets at Amortized Cost
Profit or Loss Implications
• Effective interest income
• Impairments losses and reversal gains
• Gain or loss on derecognition
Effective versus nominal rate
• Nominal rate is the coupon rate or stated rate
appearing on the face of the bond.
• Effective rate is the yield rate or market rate which is
the actual rate or true interest rate which the
bondholder earns on bond investment. It is the rate
that exactly discounts estimated future payments
through the expected life of the bonds.
• Effective rate and nominal rate are the same if the cost
of the bond investments is equal to the face value.
• Effective rate is lower than the nominal when the
bonds are acquired at a premium.
• Effective rate is higher than the nominal when the
bonds are acquired at a discount.
Effective interest method
• Requires the comparison between interest earned
and interest or interest income and interest
received. The difference between the two
represents the premium or discount amortization.
• Interest earned is computed by multiplying the
effective rate and the carrying amount.
• Interest received is computed by multiplying the
nominal rate by the face value of the bond.
• The carrying amount of the bond investment is the
initial cost plus the amortization of discount or less
periodic amortization of premium.
MCQ- Theory 1
1. The contractual agreement between an
investor and the bond issuer is contained in a
formal document known as.
a. Contract of debt
b. Bond indenture
c. Bond certificate
d. Bond agreement
MCQ- Theory 1
1. The contractual agreement between an
investor and the bond issuer is contained in a
formal document known as.
a. Contract of debt
b. Bond indenture
c. Bond certificate
d. Bond agreement
MCQ- Theory 2
2. Accrued interest on bonds that are purchased
between interest dates
a. Is ignored by both the seller and the buyer.
b. Increases the amount a buyer must pay to acquire
the bonds.
c. Is recorded as a loss on the sale of the bonds.
d. Decreases the amount a buyer must pay to acquire
the bonds.
MCQ- Theory 2
2. Accrued interest on bonds that are purchased
between interest dates
a. Is ignored by both the seller and the buyer.
b. Increases the amount a buyer must pay to acquire
the bonds.
c. Is recorded as a loss on the sale of the bonds.
d. Decreases the amount a buyer must pay to acquire
the bonds.
MCQ – Theory 3
3. The interest rate written on the face of bond is
known as
a. Nominal rate
b. Coupon rate
c. Stated rate
d. Nominal rate, coupon rate or stated rate
MCQ – Theory 3
3. The interest rate written on the face of bond is
known as
a. Nominal rate
b. Coupon rate
c. Stated rate
d. Nominal rate, coupon rate or stated rate
MCQ- Theory 4
4. If the 5 year bond matures on October 1, 2017
and interest is payable semiannually, the interest
dates are
a. April 1 and October 1
b. January 1 and July 1
c. May 1 and November 1
d. Not determinable
MCQ- Theory 4
4. If the 5 year bond matures on October 1, 2017
and interest is payable semiannually, the interest
dates are
a. April 1 and October 1
b. January 1 and July 1
c. May 1 and November 1
d. Not determinable
MCQ – Theory 5
5. The effective interest method of amortizing
discount provides for
a. Increasing amortization and increasing interest
income
b. Increasing amortization and decreasing interest
income
c. Decreasing amortization and increasing interest
income
d. Decreasing amortization and decreasing interest
income.
MCQ – Theory 5
5. The effective interest method of amortizing
discount provides for
a. Increasing amortization and increasing interest
income
b. Increasing amortization and decreasing interest
income
c. Decreasing amortization and increasing interest
income
d. Decreasing amortization and decreasing interest
income.
Schedule of Amortization

Date Interest Interest Discount Carrying

Received Income Amor. Amount
January 1, 2016 - - - 4,742,000
Dec. 31, 2016 300,000 379,360 79,360 4,821,360
Dec. 31, 2017 300,000 385,709 85,709 4,907,069
Dec. 31, 2018 300,000 392,931 92,931 5,000,000
MCQ- Theory 6
6. Bonds usually sale at a discount when
a. Investors are willing to invest in the bonds at the
stated interest rate.
b. Investors are willing to invest in the bonds at rates
that are lower than the stated interest rate.
c. Investors are willing to invest in the bonds at rates
that are higher than the stated interest rate.
d. A capital gain is expected.
MCQ- Theory 6
6. Bonds usually sale at a discount when
a. Investors are willing to invest in the bonds at the
stated interest rate.
b. Investors are willing to invest in the bonds at rates
that are lower than the stated interest rate.
c. Investors are willing to invest in the bonds at rates
that are higher than the stated interest rate.
d. A capital gain is expected.
MCQ- Theory 7
7. Bonds usually sell at a premium
a. When the market rate of interest is greater than the
stated rate of interest on the bonds.
b. When the stated rate of interest on the bonds is
greater than the market rate of interest.
c. When the price of the bonds is greater than their
maturity value.
d. In none of the above cases.
MCQ- Theory 7
7. Bonds usually sell at a premium
a. When the market rate of interest is greater than the
stated rate of interest on the bonds.
b. When the stated rate of interest on the bonds is
greater than the market rate of interest.
c. When the price of the bonds is greater than their
maturity value.
d. In none of the above cases.
Bond Investment-FVOCI
Financial Assets at Fair Value Through Other
Comprehensive Income
Requisites for Classification
• The objective of the business model is achieved
both by collecting contractual cash flows and
selling financial assets; and
• The asset’s contractual cash flows represent SPPI.
Bond Investment-FVOCI
Financial Assets at Fair Value Through Other
Comprehensive Income
Profit or Loss Implications
• Effective interest (income)
• Impairments losses and reversal gains
• Gain or loss on derecognition including
reclassification adjustments (PAS 1)
Bond Investment-FVOCI
Financial Assets at Fair Value Through Other
Comprehensive Income
OCI
Changes in fair value due to subsequent
measurement
Bond Investment – Fair value
option
Requisites for Classification
• This is a “residual category” if none of the two
previously mentioned (AC and FVOCI) business models
apply or if any of the two business model apply but the
contractual cash flows are NOT SPPI for example if
interest will include a profit participation.
• If the two requisites for the AC and FVOCI category are
met but the entity elects to measure debt instruments
at FVPL to eliminate an “accounting mismatch”
because financial liabilities are measured at FVPL.
SAMPLE PROBLEM 1:
Investment in Bonds
Problem 1
On January 1, 2016, Demeanor purchased
bonds with face value of P 5,000,000 to be held
as financial asset at amortized cost. The entity
paid P 4,600,000 plus transaction cost of P
142,000. The bonds mature on December 31,
2018 and pay 6% interest annually on
December 31 each year with 8% effective yield.
The bonds are quoted at 105 on December 31,
2016. The bonds are sold at 110 on December
31, 2017.
Required:
Prepare journal entries for 2016 and 2017.
 Journal Entries
Date Interest Interest Discount Carrying
Received Income Amor. Amount
January 1, 2016 - - - 4,742,000
Dec. 31, 2016 300,000 379,360 79,360 4,821,360
-------------------------------------------------------------------------------------------------------------
2016
Jan. 1 Investment in bonds 4,742,000
Cash 4,742,000
Dec. 31 Cash (5,000,000x6%) 300,000
Interest Income 300,000
To record interest received.
Dec. 31 Investment in bonds 79,360
Interest income 79,360
To record amortization of bond discount
Journal Entries
Date Interest Interest Discount Carrying
Received Income Amor. Amount
January 1, 2016 - - - 4,742,000
Dec. 31, 2016 300,000 379,360 79,360 4,821,360
Dec. 31, 2017 300,000 385,709 85,709 4,907,069
------------------------------------------------------------------------------------------------

2017
Dec. 31 Cash 300,000
Interest Income 300,000
Dec. 31 Investment in bonds 85,709
Interest income 85,709
Journal Entries
Date Interest Interest Discount Carrying
Received Income Amor. Amount
January 1, 2016 - - - 4,742,000
Dec. 31, 2016 300,000 379,360 79,360 4,821,360
Dec. 31, 2017 300,000 385,709 85,709 4,907,069
------------------------------------------------------------------------------------------------

Dec. 31 Cash 5,500,000

Investment in bonds 4,907,069
Gain on Sale 592,931
CA of bonds 4,907,069
Sales Price (5,000,000x110) 5,500,000
Gain on Sale 592,931
Schedule of Amortization

Date Interest Interest Discount Carrying

Received Income Amor. Amount
January 1, 2016 - - - 4,742,000
Dec. 31, 2016 300,000 379,360 79,360 4,821,360
Dec. 31, 2017 300,000 385,709 85,709 4,907,069
Dec. 31, 2018 300,000 392,931 92,931 5,000,000
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