Professional Documents
Culture Documents
Investment in Bonds
Bond
1. A bond is a formal unconditional promise made under seal to pay a specified sum
of money at a determinable future date and to make periodic interest payments
at a stated rate until the principal sum is paid.
2. The issuer of the bonds is the borrower of the funds.
3. The investor is the lender of the funds.
4. Bond indenture is the group contract between the issuer and the bondholders.
The indenture details the rights and obligations of the contracting parties,
indicates the property pledged as well as the protection offered on the loan and
name of the bank or trust company that is to represent the bondholders.
5. Bond certificates represent evidence of indebtedness. Bonds are usually issued
in denominations of P1,000 or more.
6. Interest is usually paid every six months.
7. Bond investment may either be current or non-current.
Definition of Terms
1. Bond Premium the excess of the acquisition cost over the face value of the
bond investment
2. Bond Discount the excess of the face value of the bond investment over its
acquisition cost.
Methods of Amortization
1. Straight-line provides for an equal amount of amortization for each accounting
period.
2. Accelerated applicable to callable bonds
3. Bond Outstanding applicable to serial bonds
4. Effective or Scientific Method prescribed in IFRS 9
a. Nominal or Coupon or Face Rate rate appearing on the face of the bonds
b. Effective or Yield Rate true or actual rate of interest which bondholder earns
on his investment.
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Purchase of
Trading securities bonds
Bonds
Interest income
Between Interest
Cash
Payment Dates
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Receipt of
Interest
Cash
Interest Income
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Fair Value
adjustment
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Cash
Loss on sale of trading securities bonds
Trading securities bonds
Gain on sale of trading securities bonds
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Sale of
Bonds on an
Interest
Payment Date
Sale of
Cash
Bonds
Loss on sale of trading securities bonds
Between Interest
Trading securities bonds
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Payment Dates
Interest income
Gain on sale of trading securities bonds
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Amortization of
Note: Theoretically, trading debt securities should
Bond Premium or amortize discount or premium. Recall that one of the
Discount
primary reasons for the amortization process is to
ensure the carrying amount is equal to its maturity
value. If securities are not classified as held-tomaturity, then the amortization process becomes
less relevant. [Intermediate Accounting by Skousen,
Stice and Stice 14E]
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Purchase of
Bonds
Between
Interest
Payment Dates
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Receipt of
interest
Cash
Interest income
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Amortization of
Premium
Interest income
Held to maturity securities bonds
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Amortization of
Discount
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Redemption of
Bonds on
Maturity Date
Cash
Held to maturity securities bonds
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Sale of
Cash
Bonds
Loss on sale of held to maturity securities bonds
Prior to Maturity
Held to maturity securities bonds
On an Interest
Gain on sale of held to maturity securities bonds
Payment
Date
* Update premium/discount amortization.
3
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Sale of Bonds
Cash
Prior to Maturity Loss on sale of held to maturity securities bonds
Between
Held to maturity securities bonds
Interest
Interest income
Payment
Gain on sale of held to maturity securities bonds
Dates
*Update premium/discount amortization.
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Carrying value
lower than
fair value
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Reclassification
Entry
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June 2012
Current asset
Non current asset
Other expense
Other income
Other income
Other expense
Other expense
Other income