CHAPTER 17 FINANCIAL ASSET AT AMORTIZED COST

MEASUREMENT AT AMORTIZED COST

Business model is to hold the financial asset in order to collect contractual cash flows on specified dates

The contractual cash flows are solely payments of principal and interest on the principal amount outstanding

BONDS interests are usually paid semiannually

NOTE:

When Bonds are bought in between the interest dates, the PURCHASE PRICE USUALLY INCLUDES THE ACCRUED INTEREST

So, to determine the amount for the bond, deduct the accrued interest from the purchase price, and DEBIT interest income for the accrued interest amount.

So that in the next interest date, you may record the interest at its semiannual rate

FINANCIAL ASSETS HELD FOR TRADING (BONDS)

Account to use: TRADING SECURITIES / FINANCIAL ASSET AT FAIR VALUE

INITIAL MEASUREMENT FAIR VALUE ONLY (TRANSACTION COSTS ARE EXPENSED OUTRIGHT)

SUBSEQUENT MEASUREMENT NO AMORTIZATION

GAIN ON SALE = SALE PRICE (EXCLUDING INTEREST) CARRYING AMOUNT OF BOND

FINANCIAL ASSETS AT AMORTIZED COST (BONDS)

Account to use: INVESTMENT IN BONDS / FINANCIAL ASSET AT AMORTIZED COST

INITIAL MEASUREMENT FAIR VALUE + TRANSACTION COSTS

SUBSEQUENT MEASUREMENT AMORTIZED COST

ACQUISITION COST - FACE VALUE = PREMIUM OR DISCOUNT TO BE AMORTIZED

Amortization is usually done on interest dates or at the end of the reporting period

If amortization is done on interest dates, it is still necessary to record amortization at the end of the reporting period.

Amortization of Bond Discount:

Dr. Investment in Bonds

Cr. Investment Income

Amortization of Bond Premium:

Dr. Investment Income

Cr. Investment in Bonds

SALE OF BONDS BEFORE MATURITY

UPDATE AMORTIZATION OF PREMIUM/DISCOUNT UP TO THE DATE OF SALE

DETERMINE INTEREST INCOME FROM THE LAST INTEREST DATE UP TO THE DATE OF SALE

CASH RECEIVED WILL BE = SALE PRICE + ACCRUED INTEREST INCOME

INVESTMENT IN BONDS WILL BE = ACQUISITION COST AMORTIZATION (+Discount/-Premium)

GAIN = INVESTEMENT IN BONDS (NET OF AMMORTIZATION) SALE PRICE (EXCLUDING INTEREST)

CALLABLE BONDS may be redeemed before maturity

CONVERTIBLE BONDS gives the bondholders the right to exchange their bonds for share capital of the issuing entity at any time prior to maturity

SERIAL BONDS those which have a series of maturity dates (installments)

TERM BONDS those that mature on a SINGLE DATE (CALLABLE & CONVERTIBLE BONDS CAN BE CLASSIFIED AS TERM BONDS)

METHODS OF AMORTIZATION

a. STRAIGHT LINE METHOD amortized equally based on remaining term of bond

b. BOND OUTSTANDING METHOD applied to SERIAL BONDS, amortized by multiply the premium/discount with the computed fraction (see book pp.775-776)

c. EFFECTIVE INTEREST METHOD (see book pp. 778-782)

PURCHASE PRICE

SIMPLY, IT IS THE PRESENT VALUE OF PRINCIPAL AND INTEREST

DO NOTE THAT INTEREST RATES MAY BE STATED ANNUALLY OR SEMIANNUALLY

AS FOR ACQUISITION IN BETWEEN DATES, TAKE NOTE THAT THE PURCHASE PRICE WILL CARRY WITH IT AN ACCRUED INTEREST