INVESTMENT IN DEBT SECURITIES

DEFINITION

• Investments include investment in securities, whether equity or debt securities, funds for
long term use such as plant expansion fund, equipment acquisition fund, stock redemption
fund and sinking fund, investment property and cash surrender value of life insurance
policies

NATURE

1. to earn a return on idle cash balance

2. to establish long term relationship with suppliers and customers

3. to exercise significant influence or control over another entity

4. to accumulate fund for future use

5. for capital appreciation

6. for future protection

DEBT SECURITIES

• Instruments representing a creditor relationship with an enterprise.

• include government securities such as Philippines treasury bills and warrants, corporate
bonds, convertible debt and commercial papers.

CHARACTERISTICS

1. a maturity value

2. periodic interest payments

3. a maturity date

CLASSIFICATION OF INVESTMENT IN DEBT SECURITIES

A. Debt investment at amortized cost

B. Debt investment at fair value through profit or loss

C. Debt investment at fair value through other comprehensive income

Debt investment

Problem 1

On January 1, 2019, Richmond Company purchased 4,000 of the P1,000 face value, 8%
bonds of Mike Corporation for P3,691,500. The bonds were purchased to yield 10% interest.
Interest is payable semi-annually on June 30 and December 31. The bonds mature on
December 31, 2023. On May 31, year 2021, Richmond sold the bonds for P3,925,000. This
amount includes the appropriate accrued interest.

Market value of the bonds at the end of each reporting periods follows:

December 31, 2019 97

December 31, 2020 99

Required:

1. Prepare the entries in the books of Richmond Company for year 2019-2021, as a result of
all the foregoing assuming that the securities are classified as

A. Debt investment at amortized cost

1. At what amount should the bond investment be shown on December 31, 2020
statement of financial position?

2. What amount of interest income will be taken to profit or loss for year ended
December 31, 2021?

3. What amount of gain or loss recognized on the sale of investment on May 31, 2021?

B. Debt investment at fair value through profit or loss

4. At what amount should the bond investment be shown on December 31, 2020
statement of financial position?

5. What amount of interest income will be taken to profit or loss for year ended
December 31, 2019?

6. What amount of gain or loss recognized on the sale of investment on May 31, 2021?

C. Debt investment at fair value through other comprehensive income

7. At what amount should the bond investment be shown on December 31, 2020
statement of financial position?

8. What amount of interest income will be taken to profit or loss for year ended
December 31, 2021?

9. What amount of gain or loss recognized on the sale of investment on May 31, 2021?

10. What cumulative amount of other comprehensive income shall be presented in the
equity section of statement of financial position at December 31, 2020

PROBLEM 2

On January 1, 2019, Richmond Company purchased P1,000,000, 12% bonds of Mike

Corporation. The bonds were purchased to yield 10% interest. Interest is payable every
December 31. The bonds mature on December 31, 2022. On April 1, year 2021, Richmond sold
the bonds for P600,000 face value bonds at 101 plus accrued interest.

Market value of the bonds at the end of each reporting periods follows:

December 31, 2019 108

December 31, 2020 106

December 31, 2021 107

Required:

1. Prepare the entries in the books of Richmond Company for year 2019-2021, as a result of
all the foregoing assuming that the securities are classified as

A. Debt investment at amortized cost

1. At what amount should the bond investment be shown on December 31, 2020
statement of financial position?

2. What amount of interest income will be taken to profit or loss for year ended
December 31, 2021?

3. What amount of gain or loss recognized on the sale of investment on April 1, 2021?

B. Debt investment at fair value through profit or loss

4. At what amount should the bond investment be shown on December 31, 2020
statement of financial position?

5. What amount of interest income will be taken to profit or loss for year ended
December 31, 2019?

6. What amount of gain or loss recognized on the sale of investment on April 1, 2021?

C. Debt investment at fair value through other comprehensive income

7. At what amount should the bond investment be shown on December 31, 2020
statement of financial position?

8. What amount of interest income will be taken to profit or loss for year ended
December 31, 2021?

9. What amount of gain or loss recognized on the sale of investment on April 1, 2021?

10. What cumulative amount of other comprehensive income shall be presented in the
equity section of statement of financial position at December 31, 2021

Problem 3

On June 1, 2019, Richmond Company purchased 4,000 of the P1,000 face value, 8% bonds
of Mike Corporation for P3,691,500. The bonds were purchased to yield 10% interest. Interest
is payable semi-annually on December 1 and June1. The bonds mature on June 1, 2023. On
November 1, year 2021, Richmond sold the bonds for P3,925,000. This amount includes the
appropriate accrued interest.

Market value of the bonds at the end of each reporting periods follows:

December 31, 2019 97

December 31, 2020 99

Required:

1. Prepare the entries in the books of Richmond Company for year 2019-2021, as a result of
all the foregoing assuming that the securities are classified as

A. Debt investment at amortized cost

1. At what amount should the bond investment be shown on December 31, 2020
statement of financial position?

2. What amount of interest income will be taken to profit or loss for year ended
December 31, 2021?

3. What amount of gain or loss recognized on the sale of investment on November 1,

2021?

B. Debt investment at fair value through profit or loss

4. At what amount should the bond investment be shown on December 31, 2020
statement of financial position?

5. What amount of interest income will be taken to profit or loss for year ended
December 31, 2019?

6. What amount of gain or loss recognized on the sale of investment on November 1,

2021?

C. Debt investment at fair value through other comprehensive income

7. At what amount should the bond investment be shown on December 31, 2020
statement of financial position?

8. What amount of interest income will be taken to profit or loss for year ended
December 31, 2021?

9. What amount of gain or loss recognized on the sale of investment on November 1,

2021?

10. What cumulative amount of other comprehensive income shall be presented in the
equity section of statement of financial position at December 31, 2021

Problem 4

On January 1, 2019 Richmond Corporation purchased for P95,025, a price that yield 10%, P100,000 of Mike
Company 8% bonds. The bonds pay interest annually at December 31 and mature on December 31, 2021. Richmond
designated the bonds as at amortized cost.

On December 31, 2020 Mike company, due to its financial difficulty, negotiated for restructuring of its bonds.
having been able to collect interest for year 2019, the bondholder agreed to condone the interest due on this date and
reduced the interest rate for the remaining term of the bonds to 4%.

Required:

A. Journal entries year 2019 - 2021

B. Compute for the following

1. Interest income year 2019

2. Impairment loss

3. Amount should the investment be shown on December 31, 2020