INVESTMENT IN DEBT SECURITIES

Nature of Debt Securi8es

 Any contract that re,ects a right for the holder to receive cash from the issuer or an
obliga7on for the issuer to pay cash to the holder.
 It depicts an en7ty’s debtor – creditor rela7onship.
 An example of a debt instrument is a bond.
o A bond is a formal, uncondi7onal promise made under seal to pay a de?ned sum
of money at a predetermined future date, as well as periodic interest payments
at a predetermined rate, un7l the principal sum is paid.

NOTE:
 A bond is a contract of debt.
 Types:
1) Term bonds – these are bonds that mature on a single date.
2) Serial bonds – these are bonds with series of maturity dates.

Classi=ca8on of Debt Securi8es

1. At fair value through pro?t or loss (FVPL)/Held for trading
2. At amor7zed cost
3. At fair value through other comprehensive income (FVOCI)

Basis of Classi*ca,on
Debt securi7es are classi?ed on the basis of both:
 The en7ty’s business model for managing the ?nancial assets; and
 The contractual cash ,ow characteris7cs of the ?nancial asset.

Classi*ca,on at amor,zed cost

A debt security is measured at amor8zed cost if both of the following condi7ons are met:
 BUSINESS MODEL: to hold ?nancial assets in order to collect contractual cash ,ows
(“Hold-to-Collect business model”); and
 CONTRACTUAL CASH FLOWS: solely payments of principal and interest (SPPI).

Classi*ca,on at fair value through other comprehensive income

A debt investment is measured at fair value through other comprehensive income (FVOCI) if
both of the following condi7ons are met:
 BUSINESS MODEL: to collect contractual cash ,ows and selling the asset (“Hold-to-
Collect and sell business model”); and
 CONTRACTUAL CASH FLOWS: solely payment of principal and interest (SPPI).

Classi*ca,on at fair value through pro*t or loss

 A ?nancial asset that does not meet the condi7ons for measurement at amor7zed cost
or FVOCI is measured at fair value through pro?t or loss (FVPL).
  A ?nancial asset is measured at FVPL if business model of managing ?nancial assets is to
hold investment in order to realize fair value changes.
FVPL FVOCI Amor8zed cost
Ini7al measurement Fair Value Cost* Cost*
Treatment of transac7on cost Expensed Capitalized Capitalized
Face x stated Carrying value, beg. x Carrying value, beg. x
Computa7on of Interest Income
interest rate EYec7ve interest rate EYec7ve interest rate
Computa7on of Interest
Face Value x Stated Interest Rate
Received/Receivable
Fair value at year-
Year-end valua7on Fair value at year-end Carrying value
end
Other comprehensive
Repor7ng of changes in fair value Pro?t or loss N/A
income
Financial statement classi?ca7on Current assets Noncurrent assets Noncurrent assets
Repor7ng of gain or loss on disposal Pro?t or loss
Subject to impairment No Yes Yes
*Fair value + Transac7on cost

NOTE:
 If fair value at ini7al recogni7on is not available, compute for its present value using the
eYec7ve interest rate at ini7al measurement date.
 In the case of FVOCI, any unrealized gain or loss in the OCI will be reclassi?ed to pro?t or
loss upon disposal.

Purchase between interest payment dates

 If the debt security is purchased between interest payment dates, any accrued interest
shall be excluded from the ini7al measurement of debt security. The accrued interest
shall be recorded in a separate account.

ILLUSTRATIVE EXAMPLE: Assume that a company purchased a 10% P10,000,000 face value
bonds on April 1, 2022 for a total payment of P10,200,000 including accrued interest. Interest
on the bond is payable every December 31 of every year.

The bond investment shall be ini7ally measured at P9,950,000 computed as follows:

Total cash payment to acquire the bonds 10,200,000
Less: Accrued interest (10M x 10% x 3/12) 250,000
Ini,al Measurement 9,950,000

Since the interest on the bond is payable every December 31, the last interest payment date
was December 31, 2022, which is 3 months.
Reclassi=ca8on of Financial Assets
 An en7ty shall reclassify ?nancial assets only when it changes its business model for
managing *nancial assets.

NOTE:
 The classi?ca7on date is the ?rst day of the repor7ng period following the change in
business model.
 For example, if the en7ty changed the business model during 2021 (any month),
the reclassi?ca7on date is January 01, 2022.

Rules on Reclassi=ca8on of Debt Securi8es

Reclassi?ca7on
Rules:
From: To:
1. Ini7al measurement/New carrying
amount = Fair value at reclassi?ca7on
date
2. The diYerence between the new
carrying amount and the face value
FVPL Amor7zed cost
shall be amor7zed using the eYec7ve
interest method.
3. A new eYec7ve interest rate must be
computed based on the new carrying
amount.
1. Ini7al measurement/New carrying
amount = Fair value at reclassi?ca7on
date
Amor7zed cost FVPL 2. The diYerence between the new
carrying amount and the previous
carrying shall be recognized in pro?t
or loss.
1. Ini7al measurement/New car7ng
amount = Fair value at reclassi?ca7on
date
2. The diYerence between the new
Amor7zed cost FVOCI carrying amount and the previous
carrying value shall be recognized in
OCI.
3. The same eYec7ve interest rate shall
be used.
FVOCI Amor7zed cost 1. Ini7al measurement/New car7ng
amount = Fair value at reclassi?ca7on
date
2. Cumula7ve unrealized gain or loss
 recognized in OCI shall be eliminated
and adjusted against the fair value at
reclassi?ca7on date. The security is
measured at the reclassi?ca7on date
as if it had always been measured at
amor7zed cost.
3. The same eYec7ve rate shall be used.
1. Ini7al measurement/New car7ng
amount = Fair value at reclassi?ca7on
date
FVPL FVOCI
2. A new eYec7ve interest rate must be
computed based on the new carrying
amount.
1. Ini7al measurement/New car7ng
amount = Fair value at reclassi?ca7on
date
FVOCI FVPL
2. Cumula7ve unrealized gain or loss
recognized in OCI shall be reclassi?ed
to pro?t or loss.

Problem 1
On January 2, 2022, Al Company purchased 5-year, 8% bonds with face amount of P1,000,000
for P922,768. The bonds were purchased to yield 10%. Interest is payable semi-annually every
June 30 and December 31.

The following are the quoted price of the bonds as of December 31, 2022 and 2023:
December 31, 2022 99.0
December 31, 2023 102.0

All the bonds were sold on April 30, 2024 at P980,000 plus accrued interest.

CASE 1: The objec7ve of the company’s business model is to sell such bonds in the near term to
take advantage of ,uctua7ons in fair value for short-term pro?t taking.
1. Based on the company’s business model, what would be the appropriate classi=ca8on
of the debt security?
Investment in debt security at fair value through pro*t or loss
Journal Entry:
1/2/2022 Investment in debt security – FVPL 922,768
Cash 922,768

2. How much is the interest income for the year 2022?

Interest income: 1/2/2022 – 6/30/2022 (1M x 8% x 6/12) 40,000
Interest income: 7/1/2022 – 12/31/2022 (1M x 8% x 6/12) 40,000
Interest income – 2022 80,000
 NOTE: Interest income on debt security classi?ed at FVPL shall be based on the
outstanding face amount mul7plied by stated interest rate.

Journal Entries:
6/30 Cash 40,000
Interest income 40,000
12/31 Cash 40,000
Interest income 40,000

3. At what amount shall the investment be presented on December 31, 2022?

Fair value of the debt security, 12/31/2022 (1M x 0.99) 990,000

4. How much shall be reported as unrealized gain on fair value changes in pro=t or loss, if
any, for 2022?
Fair value, 12/31/2022 990,000
Less: Balance before adjustments, 12/31/2022 922,768
Unrealized gain on FV change – 2022 67,232

Journal Entry:
12/31/2022 Investment in debt security – FVPL 67,232
Unrealized gain on FV change 67,232

5. How much is the interest income for the year 2023?

Interest income: 1/1/2023 – 6/30/2022 (1M x 8% x 6/12) 40,000
Interest income: 7/1/2023 – 12/31/2022 (1M x 8% x 6/12) 40,000
Interest income – 2023 80,000

6. At what amount shall the investment be presented on December 31, 2023?

Fair value of the debt security, 12/31/2023 (1M x 1.02) 1,020,000

7. How much shall be reported as unrealized gain on fair value changes in pro=t or loss, if
any, for 2023?
Fair value, 12/31/2023 1,020,000
Less: Balance before adjustments, 12/31/2023 990,000
Unrealized gain on fair value change – 2023 30,000

8. How much is the gain (loss) on sale of investment to be reported in pro=t or loss on
April 30, 2024?
Selling price (exclusive of accrued interest) 980,000
Less: Carrying value, 4/30/2024 1,020,000
Loss on sale of investment (40,000)

Journal Entry:
 4/30/2024 Cash* 1,006,667
Loss on sale of investment 40,000
Investment in debt security – FVPL 1,020,000
Interest income (1M x 8% x 4/12) 26,667

*Computed as follows:
Selling price 980,000
Add: Accrued interest: 1/1/2024 – 04/30/2024 26,667
Total cash received 1,006,667

CASE 2: The business model for this investment is to hold and collect contractual cash ,ows
that are solely payments of interest and principal.
1. Based on the company’s business model, what would be the appropriate classi=ca8on
of the debt security?
Investment in debt security at amor,zed cost

Journal Entry:
1/2/2022 Investment in debt security – amor7zed cost 922,768
Cash 922,768

Amor7zed schedule:
Interest Interest Discount Carrying
Date
Received* Income** Amor7za7on Amount
1/2/2022 - - - 922,768
6/30/2022 40,000 46,138 6,138 928,906
12/31/2022 40,000 46,445 6,445 935,352
6/30/2023 40,000 46,768 6,768 942,119
12/31/2023 40,000 47,106 7,106 949,225
4/30/2024 26,667 31,641 4,974 954,199
*Interest received = Outstanding face amount x stated interest x 6/12
**Interest income = Beginning CA x eRec,ve interest rate x 6/12

NOTE:
 Since the interest is payable semi-annually, the interest rates should be
mul7plied by 6/12
 The acquisi7on results to a discount because the issue price of the bonds was
below its face value.
 Amor7za7on of discount increases the carrying amount of the security.

2. How much is the interest income for the 2022?

 Interest income: 1/2/2022 – 6/30/2022 46,138
Add: Interest income: 7/1/2022 – 12/31/2022 46,445
Interest Income – 2022 92,583

Journal Entries:
6/30/2022 Cash 40,000
Interest income 40,000

Investment in DS – AC 6,138
Interest income 6,138

12/31/2022 Cash 40,000

Interest income 40,000

Investment in DS – AC 6, 445
Interest income 6,445

3. At what amount shall the investment be presented on December 31, 2022?

Investment in Debt Securi,es – Amor,zed Cost, 12/31/2022 935,352

4. How much shall be reported as unrealized gain on fair value changes in pro=t or loss, if
any, for 2022?
Zero. Because investment in debt securi7es at amor7zed cost are not remeasured to fair
value at year-end.

5. How much is the interest income for the year 2023?

Interest income: 1/1/2023 – 6/30/2023 46,768
Add: Interest income: 7/1/2023 – 12/31/2023 47,106
Interest income – 2023 93,874

6. At what amount shall the investment be presented on December 31, 2023?

Investment in Debt Securi,es – Amor,zed Cost, 12/31/2023 949,225

7. How much shall be reported as unrealized gain on fair value changes in pro=t or loss, if
any, for 2023?
Zero. Because investment in debt securi7es at amor7zed cost are not remeasured to fair
value at year-end.

8. How much is the gain (loss) on sale of investments to be reported in pro=t or loss on
April 30, 2024?
Selling price (exclusive of accrued interest) 980,000
Less: Carrying amount 954,199
Gain on sale 25,801
Journal Entries
 4/30/2024 Cash 26,667
Investment in DS – AC 4,974
Interest income 31,641

Cash 980,000
Investment in DS – AC 954,199
Gain on sale 25,801

CASE 3: The business model for this investment is to collect contractual cash ,ows that are
solely payments of principal and interest and to sell the bonds in the open market.
1. Based on the company’s business model, what would be the appropriate classi=ca8on
of the debt security?
Investment in debt security at fair value through other comprehensive income

Journal Entries:
1/2/2022 Investment in debt security – FVOCI 922,768
Cash 922,768
Amor7zed schedule:
Interest Interest Discount Carrying
Date
Received* Income** Amor7za7on Amount
1/2/2022 - - - 922,768
6/30/2022 40,000 46,138 6,138 928,906
12/31/2022 40,000 46,445 6,445 935,352
6/30/2023 40,000 46,768 6,768 942,119
12/31/2023 40,000 47,106 7,106 949,225
4/30/2024 26,667 31,641 4,974 954,199
*Interest received = Outstanding face amount x stated interest x 6/12
**Interest income = Beginning CA x eRec,ve interest rate x 6/12

2. How much is the interest income for the year 2022?

Interest income: 1/2/2022 – 6/30/2022 46,138
Add: Interest income: 7/1/2022 – 12/31/2022 46,445
Interest Income – 2022 92,583

Journal Entries:
6/30/2022 Cash 40,000
Interest income 40,000

Investment in DS – AC 6,138
Interest income 6,138

12/31/2022 Cash 40,000

 Interest income 40,000

Investment in DS – AC 6, 445
Interest income 6,445

3. At what amount shall the investment be presented on December 31, 2022?

Fair value of the debt security, 12/31/2022 (1M x 0.99) 990,000

NOTE:
 Investments in debt security at FVOCI shall be valued at fair value at year-
end.

4. How much shall be reported as unrealized gain on fair value changes in pro=t or loss, if
any, for 2022?
Zero. Any unrealized gain or loss arising from the fair value change of debt securi7es at
FVOCI are reported in OCI.

5. How much shall be reported as unrealized gain on fair value changes in other
comprehensive income as a component of comprehensive income, if any, for 2022?
Fair value, 12/31/2022 990,000
Less: Balance before adjustments, 12/31/2022 935,352
Unrealized gain on fair value change – OCI, 2022 54,648

Journal Entry:
12/31/2022 Investment in debt security – FVOCI 54,648
Unrealized gain on fair value change – OCI 54,648

6. How much is the interest income for the year 2023?

Interest income: 1/1/2023 – 6/30/2023 46,768
Add: Interest income: 7/1/2023 – 12/31/2023 47,106
Interest income – 2023 93,874

7. At what amount shall the investment be presented on December 31, 2023?

Fair value of DS, 12/31/2023 (1M x 1.02) 1,020,000

8. How much shall be reported as unrealized gain on fair value changes in other
comprehensive income as a component of comprehensive income, if any, for 2023?
Fair value, 12/31/2023 1,020,000
Less: Balance before the adjustment, 12/31/2023* 1,003,874
Unrealized gain on FV change – OCI, 2023 16,126

*Computed as follows:
Fair value, 12/31/2022 990,000
Add: Discount amor7za7on – 2023 (6,768 + 7,106) 13,874
 Balance prior to FV change, 12/31/2023 1,003,874

Journal Entry:
12/31/2023 Investment in DS – FVOCI 16,126
Unrealized gain on FV change – OCI 16,126

9. How much shall be reported as cumula8ve unrealized gain on fair value on December
31, 2023?
Unrealized gain on FV change – OCI, 2022 54,648
Add: Unrealized gain on FV change – OCI, 2023 16,126
Cumula8ve unrealized gain on FV change – OCI, 12/31/2023 70,774

Alterna7ve computa7on:
Fair value, 12/31/2023 1,020,000
Less: Carrying value, 12/31/2023 949,226
Cumula8ve unrealized gain on FV change – OCI, 12/31/2023 70,774

10. How much is the gain (loss) on sale of investments to be reported in pro=t or loss on
April 30, 2024?
Selling price (exclusive of accrued interest) 980,000
Less: Carrying value, 4/30/2024* 1,024,974
Loss ( 44,974)
Add: Cumula7ve unrealized gain on FV change, 12/31/2023 70,774
Gain on sale 25,800

*Computed as follows:
Fair value, 12/31/2023 1,020,000
Add: Discount amor7za7on: 1/1/2024 – 4/30/2024 4, 974
Carrying value, 4/30/2024 1,024,974

Journal Entries:
4/30/2024 Cash 26,667
Investment in DS – FVOCI 4,974
Interest income 31,641

Cash 980,000
Loss on sale 44,974
Investment in DS – FVOCI 1,024,974

Unrealized gain on FV change 70,774

Loss on sale 44,974
Gain on sale 25,800
Problem 2
Refer to the following two independent situa7ons:

Round oR present value factors to four decimal places.

Situa8on No. 1
On January 2, 2022, Up company acquired P9,000,000, 12% serial bonds. The bonds were
purchased to yield 10%. The principal is collec7ble in three equal annual installments beginning
December 31, 2022. Up Company holds investment in bonds to collect contractual cash ,ows
that are solely principal and interest.

Required: Compute for the following:

1. Purchase price of the bonds on January 2, 2022.
a. 9,000,000
b. 9,307,704
c. 9,447,552
d. 10,146,552
2. Interest income for the year 2022.
a. 930,770
b. 944,756
c. 1,014,656
d. 1,080,000
3. Carrying amount of the investment on December 31, 2022.
a. 6,000,000
b. 6,158,474
c. 6,312,308
d. 7,081,208
4. Interest income for the year 2023.
a. 305,679
b. 360,000
c. 615,847
d. 720,000
5. Carrying amount of the investment on December 31, 2023.
a. 3,000,000
b. 3,054,323
c. 3,223,539
d. 4,069,329
6. Interest income for the year 2024.
a. 305,679
b. 360,000
c. 615,847
d. 720,000
Situa8on No. 2
On August 1, 2022, Up Company acquired P9,000,000, 12% serial bonds. The bonds were
purchased to yield 10%. The principal is collec7ble in three equal annual installments beginning
July 31, 2023. Interest on the unpaid balance is collec7ble annually every July 31 star7ng July
31, 2023. Up Company holds investment in bonds to collect contractual cash ,ows that are
solely principal and interest.

Required: Compute for the following

1. Carrying amount of the investment on December 31, 2022.
2. Interest income for the year 2023.
3. Carrying amount of the investment on December 31, 2023.

SOLUTION (Situa8on No. 1):

Collec8on PV of 1 @
Date Total CV
Principal Interest* 10%
12/31/2022 3,000,000 1,080,000 4,080,000 0.9091 3,709,128
12/31/2023 3,000,000 720,000 3,720,000 0.8264 3,074,208
12/31/2024 3,000,00 360,000 3,360,000 0.7513 2,524,368
Investment in bonds, 1/2/2022 9,307,704
*Outstanding principal x stated interest rate
12/31/2022 (9M x 12%)
12/31/2023 [(9M – 3M) x 12%]
12/31/2024 [(9M – 6M) x 12%]

Amor7za7on schedule:
Interest Interest Premium Collec8on on Carrying
Date
Collected Income Amor8za8on Principal Value (CV)
1/2/2022 9,307,704
12/31/2022 1,080,000 930,770 (149,230) 3,000,000 6,158,474
12/31/2023 720,000 615,847 (104,153) 3,000,000 3,054,323
12/31/2024 360,000 305,679 (54,322) 3,000,000 -

SOLUTION (Situa8on No. 2)

Collec8on PV of 1 @
Date Total CV
Principal Interest 10%
7/31/2023 3,000,000 1,080,000 4,080,000 0.9091 3,709,128
7/31/2024 3,000,000 720,000 3,720,000 0.8264 3,074,208
7/31/2025 3,000,00 360,000 3,360,000 0.7513 2,524,368
Investment in bonds, 8/1/2022 9,307,704
Amor7za7on schedule:
Interest Interest Premium Collec8on on Carrying
Date
Collected Income Amor8za8on Principal Value (CV)
8/1/2022 9,307,704
7/31/2023 1,080,000 930,770 (149,230) 3,000,000 6,158,474
7/31/2024 720,000 615,847 (104,153) 3,000,000 3,054,323
7/31/2025 360,000 305,679 (54,322) 3,000,000 -

1. ANSWER: 9,245,525
Carrying value, 8/1/2022 9,307,704
Less: Premium amor7za7on: 8/1/2022 – 12/31/2022 (149,230 x 5/12) 62,179
Carrying value, 12/31/2022 9,245,525
Interest income for 2022 (930,770 x 5/12) = 378,821

2. ANSWER: 799,552
Interest income: 1/1/2023 – 7/31/2023 (930,770 x 7/12) 542,949
Interest income: 8/1/2023 – 12/31/2023 (615,847 x 5/12) 256,603
Interest income – 2023 799,552

3. ANSWER: 6,115,077
Carrying value, 7/31/2023 6,158,474
Less: Premium amor7za7on: 8/1/2023 – 12/31/2023 (104,153 x 5/12) 43,397
Carrying value, 12/31/2023 6,115,077

Problem 3
On January 1, 2022, Rodrick Company purchased four-year, P4,000,000, 10% bond at fair value.
The prevailing market rate of interest on this date was 8%. Interest is payable annually every
December 31. The company’s business model is to collect contractual cash ,ows and to sell the
asset.

The prevailing market rate of interest on December 31, 2022, 2023, and 2024 are provided
below:
Date Rate
December 31, 2022 9.0%
December 31, 2023 10.0%
December 31, 2024 7.0%

The bonds were sold on December 31, 2024 at fair value.

Round oR present value factors to four decimal places.

1. At what amount shall the investment be ini8ally recognized on January 1, 2022?

a. 3,746,368
b. 4,000,000
 c. 4,206,040
d. 4,264,840
2. How much is the interest income for the year 2022?
a. 341,187
b. 383,836
c. 400,000
d. 426,484
3. At what amount shall the investment be presented on December 31, 2022?
a. 4,000,000
b. 4,070,440
c. 4,101,320
d. 4,206,040
4. How much shall be reported in the OCI sec8on of the statement of comprehensive
income for the year 2022?
a. 104,707
b. (104,707)
c. 163,520
d. (163,520)
5. How much is the interest income for the year 2023?
a. 328,106
b. 336,482
c. 369,119
d. 400,000
6. At what amount shall the investment be presented on December 31, 2023?
a. 3,999,800
b. 4,073,960
c. 4,142,520
d. 4,400,000
7. How much shall be reported in the OCI sec8on of the statement of comprehensive
income for the year 2023?
a. 38,002
b. (38,002)
c. 101,520
d. (101,520)
8. What cumula8ve amount of unrealized gain (loss) should be reported as a component
of other comprehensive income in the statement of changes in equity on December
31, 2023?
a. 38,002
b. (38,002)
c. 142,709
d. (142,709)
9. How much is the gain (loss) on sale to be recognized in pro=t or loss on December 31,
2024?
a. Zero d. 181,039
 b. 38,330
c. (38,330)
SOLUTION (Problem 3)
1. ANSWER: D
Present value of Principal (4M x .7350) 2,940,000
Present value of interest [(4M x 10%) x 3.3121] 1,324,840
Investment in debt security – FVOCI, 1/1/2022 4,264,840

Amor7za7on schedule
Date Interest Interest Premium Carrying Value
Received Income Amor8za8on
1/1/2022 4,264,840
12/31/2022 400,000 341,187 (58,813) 4,206,027
12/31/2023 400,000 336,482 (63,518) 4,142,509
12/31/2024 400,000 331,401 (68,599) 4,073,910

2. ANSWER: A
3. ANSWER: C
Present value of principal (4M x 0.7722) (PV of 1 @ 9%; n=3) 3,088,800
Present value of interest [(4M x 10%) x 2.5313] (PV of OA @ 9%; n=3) 1,012,520
Investment in debt security – FVOCI, 12/31/2022 4,101,320

4. ANSWER: B
Fair value, 12/31/2022 4,101,320
Less: Carrying value before adjustments, 12/31/2022 4,206,027
Unrealized loss on FV change – 2022 (OCI) (104,707)

5. ANSWER: B
6. ANSWER: A
Present value of principal (4M x 0.8264) (PV of 1 @ 10%; n=2) 3,305,600
Present value of interest [(4M x 10%) x 1.7355] (PV of OA @ 10%; n=2) 694,200
Investment in debt security – FVOCI, 12/31/2023 3,999,800

7. ANSWER: B
Fair value, 12/31/2023 3,999,800
Less: Balance before adjustment, 12/31/2023* 4,037,802
Unrealized gain on FV – 2023 (OCI) (38,002)

*Computed as follows:
Fair value, 12/31/2022 4,101,320
Less: Premium amor7za7on – 2023 63,518
Balance before adjustments, 12/31/2023 4,037,802

8. ANSWER: D
 Unrealized loss on FV change – 2022 (OCI) (104,707)
Unrealized loss on FV change – 2023 (OCI) (38,002)
Cumula8ve unrealized gain (loss) on FV change, 12/31/2023 (142,709)

Alterna7ve Computa7on
Fair value, 12/31,2023 3,999,800
Less: carrying value, 12/31/2023 4,142,509
Cumula8ve unrealized gain (loss) on FV change, 12/31/2023 (142,709)

9. ANSWER: B
Selling price* 4,112,240
Less: Carrying value, 12/31/2024** 3,931,201
Balance 181,039
Cumula7ve unrealized gain (loss) on FV change, 12/31/2023 ( 142,709)
Gain on sale 38,330

*Computed as follows:
PV of principal & interest [(4M + 400T) x 0.9346] 4,112,240

**Determined as follows:
Fair value, 12/31/2023 3,999,800
Less: Premium amor7za7on – 2024 68,599
Carrying value, 12/31/2024 3,931,201

ACCOUNTING FOR INVESTMENT PROPERTIES

Nature of Investment Property

 An investment property is property (land or building – or part of a building – or both)
held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital
apprecia7on or both, rather than for
a. Use in the produc7on or supply of goods or services or for administra7ve purposes
(this pertains to property, plant and equipment); or
b. Sale in the ordinary course of business (this pertains to inventory).

NOTE:
 Only land and building can qualify as investment property.
 An equipment or any movable property cannot qualify as investment property.

Examples of Investment Property

 Land held for long-term capital apprecia7on.
 Land held for currently undetermined use.
 Building owned by an en7ty leased under an opera7ng lease.
  Building that is vacant but is held to be leased out under opera7ng lease.
 Property that is being constructed or developed for future use as investment property.

Items not considered Investment Property

 Property intended for sale in the ordinary course of business or in the process of
construc7on or development for such sale (this pertains to inventory).
 Owner-occupied property (or PPE), including (among other things):
o Property held for future use as owner-occupied property;
o Property held for future development and subsequent use as owner-occupied
property;
o Property occupied by employees (whether or not the employees pay rent at
market rates); and
o Owner-occupied property awai7ng disposal.
 Property that is leased to another en7ty under a ?nance lease.

Other Classi=ca8on Issues

1. The property is separable or non-separable
 The property is separable
 Account for the por7ons separately as investment property and owner-
occupied property.
Those por7ons of the property that are rented out or for capital
apprecia7on are classi?ed as investment property.
Those por7ons that are used by the company for administra7ve
purposes are classi?ed as owner-occupied property
 The property is non-separable
 Account for the property as investment property only if an insigni?cant
por7on is held for use in the produc7on or supply of goods or services or
for administra7ve purposes.
 Account for the property as owner-occupied property only if an
insigni?cant por7on is rented out for capital apprecia7on.

2. Provision of ancillary or support services

 The property is accounted for as an investment property if the ancillary or
support services is only an insigni?cant component of the arrangement (i.e., the
property owner provides security and maintenance services to its tenants).
 The property is accounted for as an owner-occupied property if the ancillary or
support services is a signi?cant component of the arrangement as in the case of
an owner-managed hotel.

3. Financial statement perspec,ve

 This is applicable when a company owns a property that is leased to, and
occupied by its parent or subsidiary.
 Lessor’s Separate Financial Statements – Investment property
 Group’s Consolidated Financial Statements – Owner-occupied property
Recogni8on Principle
An investment property shall be recognized as an asset when, and only when:
a) It is probable that the future economic bene?ts that are associated with the investment
property will ,ow to the en7ty; and
b) The cost of the investment property can be measured reliably.

Measurement Principles
Ini,al measurement
 An investment property shall be measured ini7ally at cost. Transac7on costs shall be
included in the ini7al measurement.

Cost of a purchased investment property

Purchase price xx
Directly atributable costs xx
Cost of investment property xx

 Directly atributable expenditure includes:

 Professional fees for legal services;
 Property transfer taxes; and
 Other transac7on costs.

Exclusions from cost of investment property

a) Start-up costs (unless they are necessary to bring the property to the condi7on
necessary for it to be capable of opera7ng in the manner intended by management),
b) Opera7ng losses incurred before the investment property achieves the planned level of
occupancy, or
c) Abnormal amounts of wasted material, labor or other resources incurred in construc7ng
or developing the property.

Cost of an investment property acquired in deferred basis

 The cost is the cash price equivalent. The diYerence between the cash price equivalent
and the installment sales price is recognized as interest over the credit period.

Cost of an investment property acquired through exchange

 With commercial substance
Fair value of asset given xx
Add: Cash paid xx
Less: Cash received xx
Cost xx

 Without commercial substance

Carrying value of asset given up xx
Add: Cash paid xx
 Less: Cash received xx
Cost* xx

*The formula can also be used in case the fair value of the asset given up or received is
not measurable.

Cost of a self-constructed investment property

Materials xx
Add: Direct labor xx
Add: Overhead atributable to the construc7on xx
Cost of a self-constructed investment property xx

Subsequent measurement
 An en7ty shall choose either the cost model or the fair value model as its accoun7ng
policy and shall apply that policy to all of its investment property.

NOTABLE DIFFERENCES
Cost Model Fair value model
Amount to be reported in Cost xx Fair value at year-end
the *nancial statement Less: Accu.Dep. (xx)
Less: Impairment (xx)
Carrying value xx
Deprecia,on The property is depreciated The property is not
over its useful life depreciated.
Changes in fair value Not recognized but disclosed in Reported in pro?t or loss.
the ?nancial statements

Reclassi=ca8on of Investment Property

 An en7ty shall transfer a property to, or from, investment property when, and only
when, there is a change in use.

Rules on Reclassi*ca,ons
 Cost Model
o Reclassi?ca7ons between investment property, owner-occupied property, and
inventory shall be made at carrying amount.
o No gain or loss shall be recognized on the transfer.

 Fair Value Model

Reclassi*ca,on
Valua,on Treatment for the diRerence
From To
Investment Inventory/owner- Fair value at the Recognized in pro?t or loss
property occupied property date of change in
Inventory Investment use Recognized in pro?t or loss
 property
Owner-occupied Investment 1. Fair value > Carrying
property property value
 Revalua7on surplus
(OCI)
 If the property was
impaired previously,
the increase is ?rst
recognized in pro=t
or loss to the extent
that it reverses the
previous
impairment/s. the
excess, if any, is
recognized as part of
OCI (revalua7on
surplus).
2. Fair value < Carrying
value
 Charge to revalua7on
surplus. The excess, if
any, is charged to
revalua7on loss or
impairment loss
(pro?t or loss).
 If there is no
revalua7on surplus,
the diYerence is
accounted for as
impairment loss.

Derecogni8on
 An investment property shall be derecognized:
o On disposal
o When the investment property is permanently withdrawn from use and no
future economic bene?ts are expected from its use and disposal.
 Net proceeds xx
Carrying value at date of derecogni7on xx
Gain (loss) on disposal – P/L xx(xx)

FINANCIAL STATEMENT PRESENTATION

 Investment property is presented under the non-current assets sec7on of the
statement of ?nancial posi7on.
Problem 1
A company completed the construc7on of a shopping mall at the end of 2016 for a total cost of
P200,000,000. The mall has an es7mated economic life of 25 years. The mall was constructed
for the purpose of earning rentals by lexng out space in the shopping mall to tenants. An
independent valua7on expert was used by the company to fair value the shopping mall on an
annual basis. According to the fair valua7on expert, the fair values of the shopping mall at the
end of 2017 and 2018 were 240,000,000 and 230,000,000, respec7vely.

Using cost model, determine

1. Deprecia7on for 2017
2. Deprecia7on for 2018
3. Carrying amount of the asset for 2017
4. Carrying amount of the asset for 2018
Using Fair Value Method, determine
1. Deprecia7on for 2017
2. Deprecia7on for 2018
3. Amount recognized in pro?t/loss from the asset for 2017
4. Amount recognized in pro?t/loss from the asset for 2018
5. Carrying amount of the asset for 2017
6. Carrying amount of the for 2018
SOLUTION (Problem 1)

COST MODEL:
1. Deprecia7on for 2017: 8,000,000
Cost of the asset 200,000,000
Divided by: useful life/economic life 25
Annual Deprecia8on 8,000 000

Journal Entry
12/31/2017 Deprecia7on Expense 8,000,000
Accumulated dep-bldg. 8,000,000

2. Deprecia7on for 2018: 8,000,000

Journal Entry
12/31/2017 Deprecia7on Expense 8,000,000
Accumulated dep-bldg. 8,000,000

3. Carrying amount of the asset for 2017: 192,000,000

Cost of the asset 200,000,000

Less: Accumulated Deprecia7on-Building 8,000,000
Carrying amount, 12/31/2017 192,000,000
 4. Carrying amount of the asset for 2018: 184,000,000

Cost of the asset 200,000,000

Less: Accumulated Deprecia7on-building 16,000,000
Carrying amount, 12/31/2018 184,000,000

OR

Carrying amount, 12/31/2017 192,000,000

Less: Deprecia7on Expense for 2018 8,000,000
Carrying amount, 12/31/2018 184,000,000

FAIR VALUE MODEL:

1. Deprecia7on for 2017: Zero
2. Deprecia7on for 2018: Zero
3. Amount recognized in pro?t/loss from the asset for 2017: 40,000,000
Fair value, 12/31/2017 240,000,000
Cost of the asset 200,000,000
Gain on fair value change 40,000,000
4. Amount recognized in pro?t/loss from the asset for 2018
Fair value, 12/31/2018 230,000,000
Fair value, 12/31/2017 240,000,000
Loss on fair value change 10,000,000

5. Carrying amount of the asset for 2017

Fair value, 12/31/2017 240,000,000

6. Carrying amount of the for 2018

Fair value, 12/31/2018 230,000,000

Problem 2
On July 1, 2022, Bronze Co. acquired a property consis7ng of twenty iden7cal freehold
detached houses each with separate 7tle including the land which it is built for P400 million,
30% of which is atributable to the land. The units have a useful life of 40 years.

The following addi7onal costs are also incurred on such date:

Transfer taxes 40 million
Legal costs directly atributable to the acquisi7on 2 million
Local property taxes for the period ending June 30, 2023 400,000
Adver7sing campaign 1 million
Opening func7on to celebrate new business 1.2 million

Throughout the six-month period ended December 31, 2022, the en7ty incurred repairs and
maintenance of P360,000.
The en7ty used one of the twenty units to accommodate the administra7on and maintenance
staY. The other nineteen units are rented out to external par7es under an opera7ng lease.

On December 31, 2022, the fair value of the investment property was P570 million. The
accoun7ng policy of the en7ty is to use the fair value model to account for investment
proper7es.

1. At what amount should the investment property be ini8ally recognized?

a. 419.90 million
b. 420.28 million
c. 442 million
d. 442.4 million

Purchase price 400,000,000

Transfer taxes 40,000,000
Legal costs directly atributable to the acquisi7on 2,000,000
Total acquisi7on cost 442,000,000

Ini7al cost of investment property (442M x 19/20) = 419,900,000

2. At what amount should the land to be accounted for as an owner-occupied property
be ini8ally recognized?
a. 6.63 million
b. 6.648 million
c. 6.654 million
d. 6.636 million

Amount allocated to owner-occupied property (442 Mx 1/20) 22,100,000

Mul7ply by: % atributable to the land 30%
Ini8al cost of land – owner-occupied 6,630,000

3. At what amount should the building to be accounted for as an owner-occupied

property be ini8ally recognized?
a. 15.47 million
b. 15.484 million
c. 15.512 million
d. 15.526 million

Amount allocated to owner-occupied property (442M x 1/20) 22,100,000

Mul7ply by: % atributable to the building 70%
Ini8al cost of building – owner-occupied 15,470,000

4. What amount should be recognized in pro=t or loss for 2022 as gain on fair value
change?
 a. 149.72 million
b. 150.1 million
c. 157.6 million
d. 158 million

Fair value, December 31, 2022 570,000,000

Less: Ini7al cost of investment property 419,900,000
Gain on fair value change 150,100,000

5. How much is the deprecia8on expense to be recognized for 2022?

a. 0
b. 193,375
c. 193,550
d. 386,750

Deprecia7on expense – 2022 [(15.47M/40) x 6/12] = 193,375

6. What total amount should be reported as expense in 2022 in rela8on to the property?
a. 2,760,000
b. 2,953,375
c. 2,960,000
d. 3,153,375

Local property taxes – 2022 (400,000 x 6/12) 200,000

Adver7sing campaign 1,000,000
Opening func7on to celebrate new business 1,200,000
Deprecia7on expense 193,375
Repairs and maintenance cost 360,000
Total Expenses – 2022 2,953,375

ACCOUNTING FOR GOVERNMENT GRANT

De=ni8on of Government Grants

 According to PAS 20, paragraph 3, government grants pertain to:
 Assistance by the government in the form of transfers of resources to an en7ty in
return for past or future compliance with certain condi7ons rela7ng to the
opera7ng ac7vi7es of the en7ty.
 They exclude those forms of government assistance which cannot reasonably
have a value placed upon them and transac7ons with government which cannot
be dis7nguished from the normal trading transac7ons of the en7ty.

Recogni8on of Government Grants

  PAS 20, paragraph 7, further provides that government grants, including non-monetary
grant at fair value, shall not be recognized un7l there is reasonable assurance that:
 The en7ty will comply with the condi7ons ataching to them
 The grants will be received.

Accoun8ng for Government Grants

 Government grants shall be recognized in pro?t or loss on a systema7c basis over the
periods in which the en7ty recognizes as expense the related costs, including
deprecia7on, for which the grant is intended to compensate.
 Rules:
a) Grants in recogni7on of speci?c expenses are recognized in pro?t or loss in the
same period as the related expenses.
b) Grants related to depreciable assets are recognized in pro?t or loss over the
periods and in propor7on of deprecia7on recognized on those assets.
c) Grants related to non-depreciable assets shall be recognized in pro?t or loss over
the periods that bear the cost of mee7ng the obliga7ons.
d) A government grant that becomes receivable as compensa7on for expenses or
losses already incurred or for the purpose of giving immediate ?nancial support
to the en7ty with no future related costs shall be recognized in pro?t or loss of
the period in which it becomes receivable.

Classi=ca8on of Government Grants

Classi=ca8on Nature Presenta8on
Grants related to assets Grants whose primary Either by:
condi7on is that an en7ty  Sexng up the grant as
qualifying for the grant shall deferred income (Gross
purchase, construct or Method), or
otherwise acquire long-term
asset. Journal Entry:
Cash xxx
Deferred grant income xxx
 By deduc7ng the grant in
arriving at the carrying
amount of the asset (Net
Method).

Journal Entry:
Cash xxx
Fixed Asset xxx
Grants related to Grants other than those Either:
income related to assets.  Use a separate income or
under a general heading
such as “Other Income”
(Gross Method), or
  Deducted in repor7ng the
related expenses (Net
Method).

Repayment of Government Grants

 A government grant that becomes repayable on demand due to non-compliance with
the agreement shall be accounted for as a change in accoun7ng es7mate.
o Grants related to assets
 Repayment of a grant related to an asset shall be recognized by
increasing the asset’s carrying value it lowering the deferred grant
income balance by the amount repayable.
 The cumula7ve addi7onal deprecia7on that would have been recognized
in pro?t or loss to date in the absence of the grant should be recognized
immediately as an expense in pro?t or loss.
o Grants related to income
 Repayment to a grant related to income is accounted for by applying the
repayment ?rst against any unamor7zed deferred grant income. In cases
where the repayment exceeds any exis7ng deferred grant income or
deferred grant income does not exist, charge to loss on repayment of
grant which will be recognized in pro?t or loss.
 Journal Entries:
Deferred grant income xxx
Loss on repayment of grant xxx
Cash xxx

NOTES: Deferred income approach is commonly applied if the problem does not state what
method to be used.

Problem 1
A grant of P30,000,000 was given to an en7ty by the Bri7sh government to help oYset safety
and environmental costs in the area where the business is located, P2,000,000, P4,000,000,
P6,000,000, and P8,000,000 in safety and environmental expenditures are es7mated to be
incurred over four years.

How much should be the grant income for the current year?
a. 3,000,000
b. 2,000,000
c. 5,000,000
d. 1,000,000

SOLUTION (Problem 1)
Journal Entries

Cash 30,000,000
 Deferred grant income 30,000,000

Environmental expenses 2,000,000

Cash 2,000,000

Deferred grant income, current year 3,000,000

Grant income (2/20 x 30M) 3,000,000

Grant income
First year (30M x 2/20) 3,000,000
Second year (30M x 4/20) 6,000,000
Third year (30M x 6/20) 9,000,000
Fourth year (30M x 8/20) 12,000,000
30,000,000

Problem 2
The American government awarded a grant of 40,000,000 to an en7ty for the development of a
laboratory and research facility with an es7mated cost of P50,000,000 and a 20-year useful life.

How much should be the grant income for the current year?
a. 3,000,000
b. 2,000,000
c. 5,000,000
d. 1,000,000

SOLUTION (Problem 2):

Journal Entries

Cash 40,000,000
Deferred grant income 40,000,000

Building 50,000,000
Cash 50,000,000

Deprecia7on 2,500,000
Accumulated deprecia7on (50M/20) 2,500,000

Deferred grant income 2,000,000

Grant income (40M/20) 2,000,000
Problem 3
Refer to the following four independent situa7ons:

Situa8on No. 1
The Philippine government grants a huge parcel of land in Cordillera to an en7ty. The land has a
fair market value of P50,000,000. According to the terms of the award, the company must build
a factory and hire solely Cordillera residents. The factory costs P80,000,000 and has a 25-year
usable life.

What is the net eiect in the pro=t or loss for the year as a result of the transac8on?
a. Increase by 1,200,000
b. Decrease by 1,200,000
c. Increase by 2,000,000
d. Decrease by 2,000,000

SOLUTION (Situa8on No.1)

Journal Entries:

Land 50,000,000
Deferred grant income 50,000,000

Building 80,000,000
Cash 80,000,000

Deprecia7on 3,200,000
Accumulated deprecia7on 3,200,000

Deferred grant income 2,000,000

Grant income (50M/25) 2,000,000

Deprecia7on (3,200,000)
Grant income 2,000,000
Net eiect on the P/L (1,200,000)

Situa8on No. 2
The Australian government awarded a grant of P15,000,000 to a corpora7on to compensate for
huge damages caused by a recent earthquake.
What is the net eiect in the pro=t or loss for the year as a result of the transac8on?
a. Increase by 7,500,000
b. Decrease by 7,500,000
c. Increase by 15,000,000
 d. No eYect

SOLUTION (Situa8on No. 2):

Journal Entry

Asset 15,000,000
Grant income 15,000,0000

Situa8on No. 3
A local government oycial gave Jala Company 5,000 hectares of land near slums outside the
city limits on January 1, 2021.

The body receiving the giz was required to clean up the area and create roads using laborers
from the hamlet where the lands was located.

The government has established a minimum wage for workers. The complete process is
expected to take three years and cost 10,000,000. This sum will be spent in three installments:
P2,000,000 in 2021, P2,000,000 in 2022, and 6,000,000 in 2023.

This property has a fair market value of P12,000,000 on January 1, 2021.

What is the net eiect in the pro=t or loss for the year 2021 as a result of the transac8on?
a. Increase by 2,400,000
b. Decrease by 2,400,000
c. Increased by 2,000,000
d. No eYect

SOLUTION (Situa8on No. 3):

Journal Entries

Land 12,000,000
Deferred grant income 12,000,000

Land improvement 2,000,000

Cash 2,000,000

Deferred grant income 2,400,000

Grant income (2/10 x 12M) 2,400,000

Situa8on No. 4
Jet Company purchased a machine for 7,000,000 at the start of the current year and obtained a
government grant of 1,000,000 to help with the capital costs.
The machine will be depreciated over 5 years on a straight-line basis, with a residual value of
500,000 at the end of that 7me.

What is the net eiect in the pro=t or loss for the current year as a result of the transac8on?
a. Increase by 200,000
b. Decrease by 200,000
c. Increase by 1,100,000
d. Decrease by 1,100,000

SOLUTION (Situa8on No. 4):

Journal Entries

Machinery 7,000,000
Cash 7,000,000

Cash 1,000,000
Deferred grant income 1,000,000

Deprecia7on expense [(7M – 500T)/5] 1,300,000

Accumulated deprecia7on 1,300,000

Deferred grant income (1M/5) 200,000

Grant income 200,000
Grant income 200,000
Deprecia7on expense (1,300,000)
Net eiect on P/L (1,100,000)

Problem 4
On January 1, 2021, Meriam Corp. engaged in two unusual transac7ons. The following is a summary of
the transac7on details:

Meriam received P20,000,000 from the local government to build an environmentally friendly plant that
will serve as a model for all future enterprises in the city. The subsidy also s7pulates that Meriam must
create processed food that will be sold at a discount for a period of ten years, which is the factory’s
usable life. The construc7on was completed on January 1, 2021, at a cost of P30,000,000.

1. How much is the income to be recognized in 2021?

a. 2,000,000
b. 3,000,000
c. 2,500,000
d. 3,500,000
2. How much is the net eiect in the 2021 pro=t or loss?
a. 0
b. 1,000,000
c. 500,000
d. (1,000,000)
 3. Which of the following will be included in the journal entry on January 1, 2025, if it was
established that Meriam was guilty of selling its products above the market price at a local
supermarket, and the grant became instantly demandable?
a. Debit loss on repayment of grant 12,000,000
b. Debit loss on repayment of grant 8,000,000
c. Debit deferred grant income 8,000,000
d. Debit deferred grant income 20,000,000

SOLUTION (Problem 4)
1. Journal Entries:
Cash 20,000,000
Deferred grant income 20,000,000

Building 30,000,000
Cash 30,000,000

Deprecia7on (30M/10) 3,000,000

Accumulated deprecia7on 3,000,000

Deferred grant income 2,000,000

Grant income (20M/10) 2,000,000

2. Deprecia7on Expense (3,000,000)

Grant income 2,000,000
Net eiect in P/L (1,000,000)

3. Deferred grant income* 12,000,000

Loss on Repayment of Grant 8,000,000
Cash 20,000,000

*Computed as follows:
Grant received 20,000,000
Realized por7on of grant:
2021 (2,000,000)
2022 (2,000,000)
2023 (2,000,000)
2024 (2,000,000)
Unrealized grant/Deferred grant income 12,000,000