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FAR.3620-Investments in Debt Instruments MAY 2024

DISCUSSION PROBLEMS
1. Which statement is correct regarding investments? LECTURE NOTES:
a. Investments are assets not directly identified with Financial Assets Classification Flowchart
the operating activities of a company.
b. Investments occupy an auxiliary relationship to
central revenue-producing activities and they are
expected to contribute to the success of the
business either by exercising certain favorable
effects upon sales and operations generally, or by
making an independent contribution to earnings
over the long term.
c. Both a and b.
d. Neither a nor b.

LECTURE NOTES:
Summary of Investments

4. Which statement is incorrect regarding contractual

cash flows that are solely payments of principal and
interest (SPPI)?
a. Contractual cash flows that are SPPI on the
principal amount outstanding are consistent with a
basic lending arrangement.
b. Principal is the fair value of the financial asset at
initial recognition.
c. An entity shall assess whether contractual cash
flows are SPPI on the principal amount outstanding
for the currency in which the financial asset is
denominated.
d. An originated or a purchased financial asset can be
a basic lending arrangement only if it is a loan in
2. Investments in debt instruments are financial assets its legal form.
because they are
a. Cash equivalents. 5. Which of the following returns is consistent with
b. Equity instruments of another entity. contractual cash flows that are SPPI?
c. Contractual rights to receive cash or another I. Return for passage of time.
financial asset from another entity. II. Return for the risk that one party to a financial
d. All of the above. instrument will cause a financial loss for the other
party by failing to discharge an obligation.
3. PFRS 9 requires entities to measure their financial III. Return for the risk that an entity will encounter
assets based on difficulty in meeting obligations associated with
a. The contractual cash flow characteristics of the financial liabilities that are settled by delivering
financial asset. cash or another financial asset.
b. The company’s business model for managing its IV. Return for amounts to cover expenses and a profit
financial assets. margin.
c. Both a and b. a. I, II, III and IV c. I and IV only
d. Neither a nor b. b. I, II and III only d. II and III only

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6. Which statement is incorrect regarding leverage? c. Sale made close to the maturity of the financial
a. Leverage increases the variability of the assets and the proceeds from the sales
contractual cash flows with the result that they do approximate the collection of the remaining
not have the economic characteristics of interest. contractual cash flows.
b. Stand-alone option, forward and swap contracts d. None of these.
are examples of financial assets that include such
leverage. 11. Under what circumstances under PFRS 9 can an entity
c. Contracts that include such leverage cannot be classify financial assets that meet the amortized cost
subsequently measured at amortized cost. criteria as at FVTPL?
d. Derivatives can be subsequently measured at fair a. Where the instrument is held to maturity.
value through other comprehensive income. b. Where the business model approach is adopted.
c. Where the financial asset passes the contractual
LECTURE NOTES: cash flow characteristics test.
d. If doing so eliminates or reduces an accounting
mismatch.

12. Which of the following is correct regarding the

classification of investment in debt instruments as
financial asset at fair value through OCI?
a. This classification is not allowed for investment in
debt instruments.
b. An entity may make an irrevocable election to
classify investment in a debt instrument that is not
‘held for trading’ as such.
c. In order to be classified as such, a debt instrument
needs to both have simple principal and interest
cash flows and be held in a business model in
which both holding and selling financial assets are
integral to meeting management’s objectives.
d. All of the above.

13. All financial assets are initially measured at fair value

plus directly attributable transaction costs, except
a. Fair value through profit and loss
b. Fair value through OCI
7. Which of the following may be classified as a financial c. Amortized cost
asset at fair value through profit or loss? d. None of the above
a. A derivative
b. A non-derivative debt instrument 14. The best evidence of fair value of a financial
c. A non-derivative equity instrument instrument at initial recognition is usually the
d. All of these transaction price. Which statement is incorrect
regarding the accounting for any difference (‘day 1’
8. Which of the following may be measured subsequently gain or loss) between the fair value measured by the
at amortized cost? entity and the transaction price?
a. A derivative a. The difference is recognized in profit or loss, if the
b. A non-derivative equity instrument estimate is measured by a quoted price in an
c. A non-derivative debt instrument active market or based on a valuation technique
d. None of these that uses only data from observable markets.
b. The difference is deferred as an adjustment to the
9. A business model refers to how an entity manages its carrying amount of the financial instrument in all
financial assets in order to generate cash flows—by other cases.
collecting contractual cash flows, selling financial c. Both a and b.
assets or both. Which of the following is considered d. Neither a nor b.
‘Held for Collection’ business model?
a. An entity manages the performance of a portfolio
of financial assets with the objective of realizing Use the following information for the next two questions.
cash flows through the sale of the assets. An entity acquired an investment in debt instrument
b. A portfolio of financial assets that is managed and classified as FA at FVTPL with the following details:
whose performance is evaluated on a fair value • Fair value based on a valuation technique that uses
basis. only data from observable markets, P100,000
c. A portfolio of financial assets that meets the • Transaction price, P98,000
definition of held for trading. • Transaction costs, P1,500
d. None of these.
15. The carrying amount of the investment on initial
10. Which of the following sale of financial assets is recognition is
inconsistent with a business model whose objective is a. P101,500 c. P99,500
to hold financial assets to collect contractual cash b. P100,000 d. P98,000
flows? 16. If the fair value is neither measured by a quoted price
a. Sale when there is an increase in the assets’ credit in an active market nor based on a valuation technique
risk. that uses only data from observable markets, the
b. Sale made to manage credit concentration risk carrying amount of the investment on initial
(without an increase in the assets’ credit risk). recognition is

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a. P101,500 c. P99,500 24. On Jan. 1 of the current year, an entity purchased a

b. P100,000 d. P98,000 debt instrument at its face value of P1,000,000. The
contractual term is ten years with an annual coupon of
6%. On Dec. 31, the fair value of the instrument
Use the following information for the next two questions. decreases to P955,000. 12-month expected credit
losses as determined under the impairment model are
On Apr. 1, Year 1, an entity purchased a P1,000,000 face
P25,000.
value 8% bond for P910,000 including accrued interest and
commission. The commission to acquire the bonds was Which statement is correct if the debt instrument is
P5,000. The bonds are dated Jan. 1, Year 1 and mature on classified as FA at FVTOCI?
Jan. 1, Year 6, and pay interest semi-annually on Jan. 1 I. The net amount to be recognized in profit or loss is
and July 1. On Dec. 31, Year 1, the bonds had a fair value P60,000.
of P920,000. On Apr. 1, Year 2, the entity sold the bonds II. The amount to be recognized in other
for a total consideration of P950,000. comprehensive income is P45,000.
III. The amount to be reported on the entity’s Dec. 31
17. What amount should the entity report as unrealized
statement of financial position is P930,000.
gain in its Year 1 profit or loss?
a. Nil c. P30,000 a. I, II and III c. I and III only
b. P15,000 d. P35,000 b. I and II only d. None of these
18. How much is the gain from the sale of investment in
debt securities on Apr. 1, Year 2?
25. On July 1, Year 1, an entity acquired P4,000,000 face
a. P10,000 c. P45,000
value of X Corporation bonds with a nominal rate of
b. P30,000 d. P65,000
interest of 4%. The bonds mature on July 1, Year 6
and pay interest semi-annually each July 1 and Jan. 1,
with the first interest payment due on Jan. 1, Year 2.
Use the following information for the next five questions.
The bonds are held for collection. At the date of
On Jan. 1, Year 1, an entity purchased P1,000,000 10% issuance, the bonds had a market rate of interest of
bonds for P1,051,510 (including broker’s commission of 6%. On Dec. 31, Year 1, the market value of the bonds
P20,000). Interest is payable annually every Dec. 31. The was P3,700,000. The amount to be recognized in Year
bonds mature on Dec. 31, Year 3. The prevailing market 1 profit or loss related to the bond investment is
rate for the bonds is 9% at Dec. 31, Year 1. a. P109,764 c. P219,529
b. P109,896 d. P219,791
19. If the bonds are classified as FA at FVTPL, the amount
to be recognized as fair value adjustment loss in its 26. On Feb. 1 of the current year, an entity purchased 5-
Year 1 profit or loss is year bonds with face value of P2,000,000 and stated
a. P 6,180 c. P26,180 interest of 12% per year payable annually every Jan.
b. P13,900 d. P33,900 1. The bonds were acquired to yield 10%. How much
was the total amount paid to purchase the bonds?
20. If the bonds are classified as FA at AC, the amount to a. P2,126,751 c. P2,151,592
be reported on the entity’s Dec. 31, Year 1 statement b. P2,149,522 d. P2,169,522
of financial position is
a. P1,017,610 c. P1,035,630 27. Which statement is incorrect regarding reclassification
b. P1,025,330 d. P1,034,340 of financial assets?
a. Reclassifications are only permitted on the change
21. Investment in debt instruments classified as FA at of an entity's business model and are expected to
FVTOCI recognizes which of the following in OCI? occur only infrequently.
a. Changes in fair value b. An entity shall account for transfers between
b. Impairment gains and losses categories prospectively, at the beginning of the
c. Interest calculated using the effective interest period after the change in the business model.
method. c. An entity shall restate any previously recognized
d. All of these. gains, losses (including impairment gains or
losses) or interest.
22. Which statement is correct if the bonds are classified d. None of these.
as FA at FVTOCI?
I. The amount to be recognized in Year 1 profit or 28. In accordance with PFRS 9, an entity may reclassify
loss is P100,000. a. Financial assets designated at FVTPL
II. The amount to be recognized in Year 1 other b. Investments in equity instruments designated at
comprehensive income is P33,900. FVTOCI
III. The amount to be reported on the entity’s Dec. 31, c. Derivatives
Year 1 statement of financial position is d. None of the above
P1,035,630.
a. I, II and III c. II and III only 29. Which statement is incorrect regarding reclassification
b. I and II only d. None of these of financial assets?
a. Reclassifications to FVTPL measurement category
23. If the entity sold the investment on Dec. 31, Year 1 at result to amounts recognized in profit or loss.
fair value and bonds are classified as FA at FVTOCI, b. The effective interest rate is determined on the
the entity will report a ‘reclassification adjustment’ of basis of the fair value of the asset at the
a. Nil c. P18,021 reclassification date when an entity reclassifies a
b. P13,900 d. P(18,021) financial asset out of FVTPL measurement
category.

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c. The effective interest rate and the measurement of 31. If the entity reclassified the bonds as FA at FVTPL after
expected credit losses are not adjusted as a result the sale, how much should be recognized in profit or
of the reclassification from AC measurement loss on reclassification date?
category to FVTOCI and vice versa. a. Nil c. P31,895
d. All reclassifications out of FVTOCI measurement b. P29,010 d. P39,010
category result in ‘reclassification adjustment’.
32. If the entity reclassified the bonds as FA at FVTOCI
after the sale, how much should be reported as
LECTURE NOTES: separate component of equity at Dec. 31, Year 2?
a. Nil c. P31,895
Summary of reclassification of financial assets
b. P29,010 d. P39,010
FROM TO ACCOUNTING
AC FVTPL The FV is measured at the 33. If the entity reclassified the bonds as FA at FVTOCI
reclassification date. Any gain or after the sale, how much should be reported as
loss arising from a difference separate component of equity at Dec. 31, Year 3?
between the previous AC and FV a. P39,010 c. P31,895
is recognized in P/L. b. P29,010 d. P 0
FVTOCI FVTPL The FA continues to be
measured at FV. The cumulative 34. Which statement is incorrect regarding presentation
gain or loss previously and disclosure of financial assets?
recognized in OCI is reclassified a. The carrying amounts of each category of financial
from equity to P/L as a assets shall be disclosed either in the statement of
reclassification adjustment at financial position or in the notes.
the reclassification date. b. FA at FVTPL are usually presented as current.
FVTPL AC The FV at the reclassification c. FA at FVTOCI are either current or noncurrent.
date becomes its new gross d. FA at AC shall be presented as noncurrent.
carrying amount.
FVTPL FVTOCI The FA continues to be 35. In accordance with PAS 1, the profit or loss section or
measured at FV. the statement of profit or loss shall include line item
AC FVTOCI The FV is measured at the for gains and losses from derecognition of
reclassification date. Any gain or a. Financial assets measured at fair value through
loss arising from a difference profit or loss.
between the previous AC of the b. Financial assets measured at fair value through
FA and FV is recognized in OCI. other comprehensive income.
The EIR and the measurement c. Financial assets measured at amortized cost.
of expected credit losses are not d. All of these.
adjusted as a result of the
reclassification. 36. In accordance with PAS 1, which of the following gains
or losses from reclassification of financial assets need
FVTOCI AC The FA is reclassified at its FV at
not be presented separately in the profit or loss section
the reclassification date.
or the statement of profit or loss?
However, the cumulative gain or
a. Reclassification of financial assets out of the
loss previously recognized in
amortized cost measurement category to FVTPL.
OCI is removed from equity and
b. Reclassification of financial assets out of the
adjusted against the FV of the
FVTOCI measurement category to FVTPL.
FA at the reclassification date.
c. Reclassification of financial assets out of the FVTPL
As a result, the FA is measured
measurement category.
at the reclassification date as if
d. None of these.
it had always been measured at
AC. This adjustment affects OCI
37. PFRS 7 requires entities to provide disclosures in their
but does not affect P/L and
financial statements that enable users to evaluate
therefore is not a reclassification
a. The significance of financial instruments for the
adjustment. The EIR and the
entity’s financial position and performance.
measurement of expected credit
losses are not adjusted as a b. The nature and extent of risks arising from
financial instruments to which the entity is exposed
result of the reclassification.
during the period and at the end of the reporting
period, and how the entity manages those risks.
c. Both a and b.
Use the following information for the next four questions.
d. Neither a nor b.
On Jan. 1, Year 1, an entity purchased P1,000,000 10%
bonds classified as FA at AC. The bonds were purchased to 38. PFRS 7 requires disclosures about the significance of
yield 12%. Interest is payable annually every Dec. 31. The financial instruments for the entity’s financial position
bonds mature on Dec. 31, Year 5. On Dec. 31, Year 1, the and performance. These disclosures do not include
bonds were selling at 99. On Dec. 31, Year 2, the entity a. Carrying amounts of each category of financial
sold P500,000 face value bonds at 101. The bonds were instruments.
selling at 103 on Dec. 31, Year 3. b. Income, expense, gains or losses recognized for
each category of financial instruments.
30. How much is the gain on sale of the investment in
c. Information about deferred ‘day 1’ gains or losses.
bonds in Year 2? d. Fair values of financial instruments when the
a. P10,000 c. P35,387 carrying amount is a reasonable approximation of
b. P29,010 d. P41,060
fair value.

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39. An entity shall disclose if, in the current or previous 41. Market risk excludes:
reporting periods, it has reclassified any financial a. Currency risk c. Other price risk
assets. For each such event, an entity shall disclose: b. Interest rate risk d. Credit risk
a. The date of reclassification.
b. A detailed explanation of the change in business 42. Currency risk is
model and a qualitative description of its effect on a. The risk that the fair value or future cash flows of a
the entity’s financial statements. financial instrument will fluctuate because of
c. The amount reclassified into and out of each changes in foreign exchange rates.
category. b. The risk that the fair value or future cash flows of a
d. All of these. financial instrument will fluctuate because of
changes in market interest rates.
40. PFRS 7 requires disclosures about qualitative and c. The risk that the fair value or future cash flows of a
quantitative information about exposure to credit, financial instrument will fluctuate because of
liquidity and market risk arising from financial changes in market prices other than those arising
instruments. Market risk is from interest rate risk or currency risk.
a. The risk that one party to a financial instrument d. The risk that the fair value or future cash flows of a
will cause a financial loss for the other party by financial instrument will fluctuate because of
failing to discharge an obligation. changes in market prices.
b. The risk that an entity will encounter difficulty in
meeting obligations associated with financial - done -
liabilities that are settled by delivering cash or
another financial asset.
c. The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of
changes in market prices.
d. None of these.

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ILLUSTRATIVE PROBLEMS
PROBLEM NO. 1 SOLUTION:
Compute for the total amount paid to purchase the bonds
Situation 1
under the following independent situations: (Round off
present value factors to four decimal places) PV of P (P1,000,000 x 0.7118) P 711,800
PV of I (P1,000,000 x 10% x 2.4018) 240,180
Situation 1 Purchase price/amount paid P951,980
Face value P1,000,000
Date of bonds Jan. 1, Year 1
Situation 2
Date of maturity Jan. 1, Year 4
Acquisition date Jan. 1, Year 1 PV of P (P1,000,000 x 0.7462) P 746,200
Nominal rate 10% PV of I (P1,000,000 x 6% x 5.0757) 304,542
Effective rate 12% Purchase price/ amount paid P1,050,742
Interest payment date Jan. 1

Situation 2 Situation 3
Face value P1,000,000 PV of P (P1,000,000 x 0.7050) P705,000
Date of bonds Jan. 1, Year 1 PV of I (P1,000,000 x 5% x 4.9173) 245,865
Date of maturity Jan. 1, Year 4 Purchase price, 1/1/Y1 950,865
Acquisition date Jan. 1, Year 1 Add discount amort. 1/1/ - 3/1:
Nominal rate 12% EI (PV on 1/1 x 6% x 2/6) P19,017
Effective rate 10% NI (P1M x 5% x 2/6) ( 16,667) 2,350
Interest payment dates Jan. 1 and July 1 Purchase price, 3/1/Y1 953,215
Add accrued interest (P1M x 5% x 2/6) 16,667
Situation 3 Total amount paid P969,882
Face value P1,000,000
Date of bonds Jan. 1, Year 1
Situation 4
Date of maturity Jan. 1, Year 4
Acquisition date Mar. 1, Year 1 Prin- Int. PVF@
Nominal rate 10% Date cipal @10% Total 12% PV, 1/1/Y1
Effective rate 12% 12/31/Y1 1M .3M 1.3M 0.8929 1,160,770
Interest payment dates Jan. 1 and July 1 12/31/Y2 1M .2M 1.2M 0.7972 956,640
12/31/Y3 1M .1M 1.1M 0.7118 782,980
Situation 4 Total 3M 2,900,390
Face value P3,000,000
Date of bonds Jan. 1, Year 1
Date of maturity P1,000,000 annually starting
Dec. 31, Year 1
Acquisition date Jan. 1, Year 1
Nominal rate 10%
Effective rate 12%
Interest payment Dec. 31

PROBLEM NO. 2
On Jan. 1, Year 1, an entity purchased P1,000,000 8% bonds for P924,164 (including broker’s commission of P50,000).
The bonds were purchased to yield 10%. Interest is payable annually every Jan. 1. The bonds mature on Jan. 1, Year 6.

Quoted price of the bonds as of the dates indicated follows:

Dec. 31, Year 1 98.0
Dec. 31, Year 2 99.0

REQUIRED:
A. Prepare the journal entries on the books of the entity to record the following: (Round off present value factors to four
decimal places)
1. purchase of the investment on Jan. 1, Year 1;
2. accrual of interest income on Dec. 31, Year 1;
3. amortization of premium or discount on Dec. 31, Year 1; and
4. fair value adjustment as of Dec. 31, Year 1
under the following assumptions:
a. the investment is FA at FVTPL;
b. the investment is FA at FVOCI; and
c. the investment is FA at AC.

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B. Compute for the carrying amount of the investment in bonds at Dec. 31, Year 1 if:
a. the investment is FA at FVTPL; P980,000
b. the investment is FA at FVTOCI; and P980,000
c. the investment is FA at AC P936,580

C. Assuming the bonds were sold on Dec. 31, Year 2 at 99, prepare the journal entry to record the sale under the
following assumptions:
a. the investment is FA at FVTPL;
b. the investment is FA at FVTOCI; and
c. the investment is FA at AC
- end -

SOLUTION:
FA@FVTPL FA@FVTOCI FA@AC

A.1) Purchase of investment:

FA at FVTPL P874,164 FA at FVTOCI P924,164 FA at AC P924,164

Commission exp. 50,000 Cash P924,164 Cash P924,164
Cash P924,164

A.2) Accrual of interest:

Interest receivable P80,000 Interest receivable P80,000 Interest receivable P80,000
Interest income P80,000 Interest income P80,000 Interest income P80,000

A.3) Amortization of discount:

No entry FA at FVTOCI P12,416 FA at AC P12,416
Interest income P12,416 Interest income P12,416

A.4) FV adjustment:
FA at FVTPL P105,836 FA at FVTOCI P43,420 No entry
FV adj. gain (P/L) P105,836 FV adj. G/L (OCI) P43,420

C) Sale of investment:
To update amortization To update amortization To update amortization
No entry FA at FVTOCI P13,658 FA at AC P13,658
Interest income P13,658 Interest income P13,658

FV adjustment before sale FV adjustment before sale FV adjustment before sale

No entry FV adj. G/L (OCI) P3,658 No entry
FA at FVTOCI P3,658

Disposal entry Disposal entry Disposal entry

Cash P1,070,000 Cash P1,070,000 Cash P1,070,000
FA at FVTPL P980,000 FV adj. G/L (OCI) 39,762 FA at AC P950,238
Interest income 80,000 FA at FVTOCI P990,000 Interest income 80,000
Gain on sale 10,000 Interest income 80,000 Gain on sale 39,762
Gain on sale 39,762

Amortization schedule:
Date EI (10%) NI (8%) Disc. Amort. Gross C.A.
01/01/Y1 P 924,164
12/31/Y2 P92,416 P80,000 P12,416 936,580
12/31/Y3 93,658 80,000 13,658 950,238
12/31/Y4 95,024 80,000 15,024 965,262
12/31/Y5 96,526 80,000 16,526 981,788
12/31/Y6 98,212 80,000 18,212 1,000,000

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