INVESTMENT IN DEBT SECURITIES

Financial instruments w a maturity value, interest rate

that specifies the periodic interest payments, and
maturity date.
Investor=creditor

issuer= debtor

So the investors income is the interest from the debt

Ex. Treasury notes, Bond certificates- contract of debt
where the issuer borrows fund from an investor (similar
to a promissory note, but instead of the latter, bond
certificate is issued)
Bond investments are recorded at fair value +
transaction costs, however transaction costs
attributable to trading investments are expensed
immediately
Classifications:
(1) debt investments at amortized cost or
-- to earn interest
-- measured at amortized cost using the
effective interest method
-- transaction cost are amortized w/ cost
(2) debt investments at FMV through profit and loss
-- for the purpose of selling the debt securities
before maturity; trading or trading securities
-- Trading bond investments are measured at
fair value through profit and loss, it is not necessary
to amortize any premium or discount
--transaction costs are expensed
DEBT INVESTMENTS AT AMORTIZED COST
Exceptions that would still classify it as is:
Sale because the interest rate doesnt meet
the entitys investment requirements
Sale because the company needs fund for
capital purposes
Sale because the company is an insurer and
adjusts its portfolio to reflect change in
expected duration
Premium if original cost is greater than the face
value
Entries shall be prepared every interest date:
Step1. Collected the periodic interest
Cash
xx
interest revenue
xx
Step2. Amortization of premium
interest revenue
xx
debt investments
xx

Discount if the original cost is less than the face

value
Entries shall be prepared every interest date:
Step1. Collected the periodic interest
Cash (Nominal Interest)
xx
Interest revenue
xx
Step2. Amortization of the discount
Interest Revenue
xx
Debt investments
xx
*original cost=purchase price+transaction cost
*face value= actual amount in the bonds
*these accounts are netted against the
investment cost in balance sheet

Acquisition w/ premium
Step1. Record acquisition at cost. Not face value!
Debt invst. at amortized cost-xyz bonds xx
cash
xx
Step2. Get the nominal interest- fixed every year
that the issuer pays to investor;
Face Value X stated interest rate
Cash xx
interest revenue
xx
Step3. Get the effective interest [Carrying value X
effective or market rate] then deduct the nominal
interest- this is to amortize the premium:
interest revenue
xx
debt invst. At ac-xyz bonds
xx
*carrying value=cost-effective interest
*interest is divided on how often payment is due
(semi annual /2 etc.)
Acquisition w/discount
Step1. Same as above
Step2. Same as above
Step3. Get the effective interest [Carrying value X
effective or market rate] then ADD the nominal
interest
If the bond year does not coincide w/ the
accounting periodentries are as follows:
Interest receivable
xx
interest revenue
xx
debt invst. At ac-xyz bonds
xx
*Example computations are as follows:
Amt in step 2 x 4/6
effective interest x 4/6
nominal interest x 4/6
Purchase of bonds between interest payment dates
Step1. Compute for interest receivable [face
amount X stated interest X months lapsed/ 12]
Step2. Entry for acquisition is same as above, but
additional debit of Interest Receivable (from step 1)
Disposal of debt instruments at amortized cost
between interest payment rates

Step1. Adjust interest revenue (same as when it

does not coincide w/ the accounting period), but
the amounts are of the next line of items
Step2. Record sale @ 101
cash
xx
loss on sale of debt invst xx
debt invst at ac-xyz bond
xx
interest receivable
xx
*sales price (face value X 101%)
+ interest receivable (face value X undivided stated
interest X months lapsed)
=cash
*Carrying amount of debt invst cash =loss
Impairment loss on debt investments measured at
amortized cost
Debt investments at Fair Value through Profit or
Loss
When it intends to speculate on
fluctuations of interest rate, rather than to
collect contractual cash flows that are
payments for principal and interest

Recorded at purchase price

Transaction costs, even if directly
attributable, are expensed
At reporting date, unrealized gains and
losses are taken to profit and loss
Discount and premium are not amortized,
hence the interest revenue is based on the
stated interest