Partially Owned Bonds

Lesson 4.
3: Intercompany Sale of Bonds (Partially owned)
Learning Objectives:
1. To understand economic entity concept - the underlying concept of
consolidated financial statements.
2. To understand the effects of intercompany bond transactions on the
consolidated financial statements.
References: IFRS 3: Business Combination;

IFRS 10 Consolidated Financial Statements
Consolidation Procedures (continuation)

1. Intragroup balances, transactions, income and expenses shall be
eliminated in full.
a. Intercompany sale of inventory
b. Intercompany sale of non-depreciable assets
c. Intercompany sale of depreciable assets
d. Intercompany sale of bonds
e. Intercompany leases
2. An entity shall attribute the profit or loss and each component of other
comprehensive income to the owners of the parent and to the non-
controlling interests. The entity shall also attribute total comprehensive
income to the owners of the parent and to the non-controlling interests
even if this results in the non-controlling interests having a deficit balance.
For intercompany transactions:
Upstream transactions:
The subsidiary incurs the related profit or loss; thus, a part of the
recognized income shall be attributed to the non-controlling interest.
This is true when the subsidiary is the issuer of the bonds.
Downstream transactions:
The parent incurs the related profit or loss; thus, the recognized income
shall be solely attributed to the parent. This is true when the parent is the
issuer of the bonds.
Module 2: Accounting for Subsidiaries and Business Combinations

Lesson 4.3: Intercompany Sale of Bonds (Partially owned)
INTERCOMPANY SALE OF BONDS

General Journal Entries:
Books of Issuer Books of Investor WPEE
Dr. Cash (proceeds from issuance) Dr. Investment in bonds (selling price) Dr. Bonds payable
Dr. <Discount on bond> Cr. Cash (selling price) Dr. <Premium on bond>
Cr. Bonds payable (par) Cr. <Discount on bond>
Cr. <Premium on bond> *Classify as FVTPL, AFS or HTM Cr. Investment in bonds
**Difference between Issuers cost and acquisition
date fair value is charged to gain/loss on
extinguishment
Investors Classification: Held to Maturity (HTM)
Dr. Interest Expense Dr. Cash Dr. Interest Income

Dr. <Premium on bond> Dr. Investment in bonds Dr. <Discount on bond>
Cr. <Discount on bond> Cr. Investment in bonds Dr. Investment in bonds
Cr. Cash Cr. Interest Income Cr. Investment in bonds
Cr. <Premium on bond>
Cr. Interest Expense
Dr. Interest Expense Dr. Interest Receivable Dr. Interest Payable

Cr. Interest Payable Cr. Interest Income Cr. Interest Receivable

Succeeding Years <mirror>

Mirror: Issuance Dr. Bonds payable
Dr. <Premium on bond>
Dr. / Cr. Retained earnings, beg.
Dr. / Cr. Non-controlling interest, beg.
Cr. <Discount on bond>
Cr. Investment in bonds
Mirror: Prior Years Journal Entries <mirror>

Amortization of Interest Dr. <Discount on bond>
Dr. / Cr. Retained earnings, beg.
Dr. / Cr. Non-controlling interest, beg.
Dr. / Cr. Investment in bonds
Cr. <Premium on bond>
Current Years Journal Entries

Dr. Interest Expense Dr. Cash Dr. Interest Income
Dr. <Premium on bond> Dr. Investment in bonds Dr. <Discount on bond>
Cr. <Discount on bond> Cr. Investment in bonds Dr. / Cr. Investment in bonds
Cr. Cash Cr. Interest Income Cr. <Premium on bond>
Cr. Interest Expense
Dr. Interest Expense Dr. Interest Receivable Dr. Interest Payable

Cr. Interest Payable Cr. Interest Income Cr. Interest Receivable

General Example - Investors Classification: Held to Maturity (HTM)

1. Sal is a partially-owned subsidiary of Pid where Pid has 80% ownership interest. On January 1, 2007, Pid Corporation
issued 5 year bonds at par for P10 Million 10% corporate bonds. The bonds pay interest semi-annually (July 1 and
January 1). Sal bought P2 Million of Pids bonds on the date of issuance.
Books of intergroup issuer Books of intergroup Investor WPEE
Dr. Cash P10 Million Dr. Investment in HTM P2Million Dr. Bonds payable P2 Million
Cr. Bonds payable P 10 Million Cr. Cash P2Million Cr. Investment in HTM P2 Million
July 1
Dr. Interest expense P500K Dr. Cash P100K Dr. Interest income P200K
Cr. Cash P500K Cr. Interest income P100K Cr. Interest expense P200K
December 31
Dr. Interest payable P100K
Dr. Interest expense P500K Dr. Interest receivable P100K
Cr. Interest receivable P100K
Cr. Interest payable P500K Cr. Interest income P100K
Downstream Transaction Example - Investors Classification: Held to Maturity (HTM)

2. Sal is a wholly-owned subsidiary of Pid. On January 1, 2007, Pid Corporation issued 5 year bonds at par for P10
Million 10% corporate bonds. The bonds pay interest semi-annually (July 1 and January 1). On July 1, 2007, Sal
bought P2 Million of Pids bonds from the secondary market to yield 9% to maturity. Sal has both the ability and
intention to hold the bonds to maturity.

2,072,687.90
Principal 2,000,000.00 1 93,270.96 100,000.00 (6,729.04) 2,065,958.86
Coupon rate 10% 2 92,968.15 100,000.00 (7,031.85) 2,058,927.01
Stated rate 9% 3 92,651.72 100,000.00 (7,348.28) 2,051,578.72
term 4.5 4 92,321.04 100,000.00 (7,678.96) 2,043,899.77
interest frequency 2 5 91,975.49 100,000.00 (8,024.51) 2,035,875.26
6 91,614.39 100,000.00 (8,385.61) 2,027,489.64
PV of principal 0.672904428 1,345,808.86 7 91,237.03 100,000.00 (8,762.97) 2,018,726.68
PV of interest 7.268790495 726,879.05 8 90,842.70 100,000.00 (9,157.30) 2,009,569.38
PV of bonds 2,072,687.90 9 90,430.62 100,000.00 (9,569.38) 2,000,000.00
Books of intergroup issuer Books of intergroup investor WPEE
Dr. Cash P10 Million Dr. Bonds Payable P 2 Million

Cr. Bonds payable P 10 Million Dr. Loss from extinguishment
of debt P 72,688
July 1, 2007 Cr. Investment in HTM P 2,072,688
Dr. Interest expense P500K Dr. Investment in HTM P2,072,688
Cr. Cash P500K Cr. Cash P2,072,688 Dr. Interest income P 93,271
Dr. Investment in HTM 6,729
Cr. Interest expense P 100,000
December 31, 2007



Cr. Interest payable P500K Cr. Investment in HTM P6,729
Cr. Interest income P93,271
July 1, 2008 Dr. Bonds Payable P 2 Million

Dr. Interest expense P500K Dr. Cash P100K Dr. RE, beginning P 72,688
Cr. Cash P500K Cr. Investment in HTM P7,032 Cr. Investment in HTM P 2,072,688
Dr. Investment in HTM P6,729
December 31, 2008
Cr. RE, beginning P6,729
Dr. Interest income P 185,620

Cr. Cash P500K Cr. Investment in HTM P7,679 Cr. Investment in HTM P 2,072,688

December 31, 2009


Cr. Interest income P91,976 Dr. Interest income P 184,297

Upstream Transaction Example - Investors Classification: Held to Maturity (HTM)

3. Sal is a-owned subsidiary of Pid where Pid has 80% ownership interest. On January 1, 2007, Sal Company issued 5
year bonds at par for P10 Million 10% corporate bonds. The bonds pay interest semi-annually (July 1 and January 1).
On July 1, 2007, Pid bought P2 Million of Sals bonds from the secondary market to yield 9% to maturity. Pid has both
the ability and intention to hold the bonds to maturity.
Dr. Cash P10 Million Dr. Bonds Payable P 2 Million

Cr. Bonds payable P 10 Million Dr. Loss from extinguishment RE, end
of debt P 72,688 NCI, end

Dr. Interest expense P500K Dr. Investment in HTM P2,072,688
Cr. Cash P500K Cr. Cash P2,072,688 Dr. Interest income P 93,271 RE, end
Dr. Investment in HTM 6,729 NCI, end


December 31, 2007


Cr. Cash P500K Cr. Investment in HTM P7,032 Dr. NCI, beginning P 14,538
Cr. Interest income P92,968 Cr. Investment in HTM P 2,072,688
December 31, 2008

Cr. NCI, beginning P1,346
Dr. Interest income P 185,620 RE, end


Cr. Cash P500K Cr. Investment in HTM P7,679 Dr. NCI, beginning P 14,538


Cr. Interest income P92,321 Cr. Investment in HTM P 2,072,688

December 31, 2009
Cr. NCI, beginning P 4,222
Dr. Interest income P 184,297 RE, end

Downstream Transaction Example - Investors Classification: Held to Maturity (HTM)

4. Sal is a partially-owned subsidiary of Pid where Pid has 80% ownership interest. On January 1, 2007, Pid Corporation
issued 5 year bonds for P10 Million to yield 7% (per annum) to maturity . The bonds pay 10% (per annum) interest
semi-annually (July 1 and January 1). On July 1, 2007, Sal bought P2 Million of Pids bonds from the secondary
market to yield 9% to maturity. Sal has both the ability and intention to hold the bonds to maturity.
Refer to Table 1 for Issuers (Pid) valuation and amortization table, Table 2 for Investors (Sal) valuation and
amortization table and Table 3 for Analysis of Intercompany Bond Transaction

Books of intergroup seller Books of intergroup buyer WPEE
Dr. Cash P11,247,491 Dr. Bonds Payable P 2,000,000

Cr. Bonds payable P10,000,000 Dr. Premium on BP P 228,231
Cr. Premium on BP P 1,247,491 Cr. Gain from extinguishment
of debt P 155,543
Dr. Interest expense P393,662 Dr. Investment in HTM P2,072,688
Dr. Premium on BP P106,338 Cr. Cash P2,072,688 Dr. Investment in HTM P 6,729
Cr. Cash P500K Dr. Interest income P 93,271
Cr. Premium on BP P 22,012
December 31, 2007
Dr. Interest expense P389,940 Dr. Interest receivable P100K
Dr. Premium on BP P110,060 Cr. Investment in HTM P6,729
Cr. Interest payable P500K Cr. Interest income P93,271
July 1, 2008 Dr. Bonds Payable P 2,000,000

Dr. Interest expense P386,088 Dr. Cash P100K Dr. Premium on BP P 228,231
Dr. Premium on BP P113,912 Cr. Investment in HTM P7,032 Cr. RE, beginning P 155,543
Cr. Cash P500K Cr. Interest income P92,968 Cr. Investment in HTM P 2,072,688
December 31, 2008

Dr. Investment in HTM P 6,729
Dr. RE, beg P 15,283




Cr. Cash P500K Cr. Interest income P92,321 Cr. Investment in HTM P 2,072,688
December 31, 2009

Dr. Premium on BP 126,296 Cr. Investment in HTM P8,024



11,247,490.80
Principal 10,000,000.00 1 393,662.18 500,000.00 (106,337.82) 11,141,152.98
Coupon rate 10% 2 389,940.35 500,000.00 (110,059.65) 11,031,093.33
Stated rate 7% 3 386,088.27 500,000.00 (113,911.73) 10,917,181.60
term 5 4 382,101.36 500,000.00 (117,898.64) 10,799,282.95
6 373,704.02 500,000.00 (126,295.98) 10,550,961.88
PV of principal 0.708918814 7,089,188.14 7 369,283.67 500,000.00 (130,716.33) 10,420,245.55
PV of interest 8.316605323 4,158,302.66 8 364,708.59 500,000.00 (135,291.41) 10,284,954.14
9 359,973.39 500,000.00 (140,026.61) 10,144,927.54
PV of bonds 11,247,490.80 10 355,072.46 500,000.00 (144,927.54) 10,000,000.00
Table 1: Issuers Valuation and Amortization Table
2,072,687.90
Principal 2,000,000.00 1 93,270.96 100,000.00 (6,729.04) 2,065,958.86
Coupon rate 10% 2 92,968.15 100,000.00 (7,031.85) 2,058,927.01
Stated rate 9% 3 92,651.72 100,000.00 (7,348.28) 2,051,578.72
term 4.5 4 92,321.04 100,000.00 (7,678.96) 2,043,899.77
6 91,614.39 100,000.00 (8,385.61) 2,027,489.64
PV of principal 0.672904428 1,345,808.86 7 91,237.03 100,000.00 (8,762.97) 2,018,726.68
PV of interest 7.268790495 726,879.05 8 90,842.70 100,000.00 (9,157.30) 2,009,569.38
PV of bonds 2,072,687.90 9 90,430.62 100,000.00 (9,569.38) 2,000,000.00
Table 2: Investors Valuation and Amortization Table

Carrying Value of Liability 2,228,230.60

Principal 2,000,000.00 1 77,988.07 100,000.00 (22,011.93) 2,206,218.67
Coupon rate 10% 2 77,217.65 100,000.00 (22,782.35) 2,183,436.32
Stated rate 7% 3 76,420.27 100,000.00 (23,579.73) 2,159,856.59
term 4.5 4 75,594.98 100,000.00 (24,405.02) 2,135,451.57
6 73,856.73 100,000.00 (26,143.27) 2,084,049.11
PV of principal 0.733730972 1,467,461.94 7 72,941.72 100,000.00 (27,058.28) 2,056,990.83
PV of interest 7.607686509 760,768.65 8 71,994.68 100,000.00 (28,005.32) 2,028,985.51
9 71,014.49 100,000.00 (28,985.51) 2,000,000.00
PV of bonds 2,228,230.60 sum 671,769.40
Carrying Value of Investment in Bonds 2,072,687.90

Principal 2,000,000.00 1 93,270.96 100,000.00 (6,729.04) 2,065,958.86
Coupon rate 10% 2 92,968.15 100,000.00 (7,031.85) 2,058,927.01
Stated rate 9% 3 92,651.72 100,000.00 (7,348.28) 2,051,578.72
term 4.5 4 92,321.04 100,000.00 (7,678.96) 2,043,899.77
6 91,614.39 100,000.00 (8,385.61) 2,027,489.64
PV of principal 0.672904428 1,345,808.86 7 91,237.03 100,000.00 (8,762.97) 2,018,726.68
PV of interest 7.268790495 726,879.05 8 90,842.70 100,000.00 (9,157.30) 2,009,569.38
9 90,430.62 100,000.00 (9,569.38) 2,000,000.00
PV of bonds 2,072,687.90 sum 827,312.10
Gain from extinguishment 155,542.69 155,542.69 reversal of gain
Table 3: Summary of Intercompany Bond Transaction

Upstream Transaction Example - Investors Classification: Held to Maturity (HTM)

5. Sal is a partially-owned subsidiary of Pid where Pid has 80% ownership interest. On January 1, 2007, Sal Company
issued 5 year bonds for P10 Million to yield 7% (per annum) to maturity . The bonds pay 10% (per annum) interest
semi-annually (July 1 and January 1). On July 1, 2007, Pid bought P2 Million of Sals bonds from the secondary
market to yield 9% to maturity. Pid has both the ability and intention to hold the bonds to maturity.
Refer to Table 1 for Issuers (Sal) valuation and amortization table, Table 2 for Investors (Pid) valuation and
amortization table and Table 3 for Analysis of Intercompany Bond Transaction

of debt P 155,543
Dr. Interest expense P393,662 Dr. Investment in HTM P2,072,688
Dr. Premium on BP P106,338 Cr. Cash P2,072,688 Dr. Investment in HTM P 6,729
Cr. Cash P500K Dr. Interest income P 93,271
December 31, 2007


Cr. Cash P500K Cr. Interest income P92,968 Cr. NCI, beginning P 31,109
Cr. Investment in HTM P 2,072,688
December 31, 2008
Dr. NCI, beg P 3,057





Cr. Investment in HTM P 2,072,688
December 31, 2009
Dr. Premium on BP 126,296 Cr. Investment in HTM P8,024


Assignment Investors Classification: Fair Value through Profit or Loss and Available-for-sale
A. Intercompany transactions: bonds
1. Sal is a partially-owned subsidiary of Pid where Pid has 80% ownership interest. On January 1, 2007, Pid (Sal)
Corporation issued 5 year bonds at par for P10 Million 10% corporate bonds. The bonds pay interest semi-annually
(July 1 and January 1). Sal (Pid) bought P2 Million of Pids (Sals) bonds on the date of issuance.
Pids (Sals) bonds were trading in the secondary market at 99, 101 and 98 on December 31, 2007, 2008 and 2009,
respectively.

a. Sals investment in Pid Corporate bonds are held for trading purposes. (Downstream)
Dr. Cash P10 Million Dr. Investment in FVTPL P2Million

Cr. Bonds payable P 10 Million Cr. Cash P2Million
July 1, 2007
December 31, 2007


Dr. Loss from FVTPL valuation P 20,000
Dr. Investment in FVTPL P 20,000
Cr. Investment in FVTPL P 20,000
Cr. Loss from FVTPL valuation P 20,000
Dr. Bonds payable P2 Million

Cr. Investment in FVTPL P2 Million

July 1, 2008 Dr. Interest income P200K

Dr. Interest expense P500K Dr. Cash P100K Cr. Interest expense P200K
Cr. Cash P500K Cr. Interest income P100K
December 31, 2008
Cr. RE, beginning P 20,000

BV, unadjusted: P 1,980,000
Dr. Gain from FVTPL valuation P 40,000
MV, Dec. 2008: P 2,020,000

Cr. Gain from FVTPL valuation P 40,000

December 31, 2009
Dr. RE, beginning P 20,000


 Cr. Investment in FVTPL P 20,000
MV, Dec. 2009: P 1,960,000 Dr. Investment in FVTPL P 60,000
Cr. Investment in FVTPL P 60,000 Dr. Bonds payable P2 Million

b. Pids investment in Sal Corporate bonds are held for trading purposes. (Upstream)
Dr. Cash P10 Million Dr. Investment in FVTPL P2Million

July 1, 2007
December 31, 2007

Dr. Investment in FVTPL P20,000 RE,end

Cr. Loss from FVTPL valuation P20,000 NCI,end



December 31, 2008



Cr. RE, beginning P 16,000
Cr. NCI, beginning P 4,000
MV, Dec. 2008: P 2,020,000



December 31, 2009
Dr. NCI, beginning P 4,000



MV, Dec. 2009: P 1,960,000
Dr. Loss from FVTPL valuation P 60,000 Cr. Loss from FVTPL valuation P 60,000
c. Sals investment in Pid Corporate bonds are classified as available for sale investments. (Downstream)
Dr. Cash P10 Million Dr. Investment in AFS P2Million

July 1, 2007
December 31, 2007



 Dr. Investment in AFS P 20,000
Dr. UGL - AFS valuation P 20,000 Cr. Unrealized Loss AFS valuation P 20,000
Cr. Investment in AFS P 20,000
Cr. Investment in AFS P2 Million

December 31, 2008
Dr. UGL - AFS valuation P 20,000

MV, Dec. 2008: P 2,020,000
Dr. Investment in AFS P 40,000

Cr. UGL - AFS valuation P 40,000



December 31, 2009
Cr. UGL AFS valuation P 40,000

MV, Dec. 2009: P 1,960,000


d. Pids investment in Sal Corporate bonds are classified as available for sale investments. (Upstream)
Dr. Cash P10 Million Dr. Investment in AFS P2Million

July 1, 2007
December 31, 2007



Cr. Unrealized Loss AFS valuation P 20,000



December 31, 2008

MV, Dec. 2008: P 2,020,000

Cr. UGL - AFS valuation P 40,000

December 31, 2009

MV, Dec. 2009: P 1,960,000


2. Sal is a partially-owned subsidiary of Pid where Pid has 80% ownership interest. On January 1, 2007, Pid (Sal)
Corporation issued 5 year bonds for P10 Million to yield 7% (per annum) to maturity. The bonds pay 10% (per annum)
interest semi-annually (July 1 and January 1). On July 1, 2007, Sal (Pid) bought P2 Million of Pids bonds from the
secondary market to yield 9% to maturity.
Pids bonds were trading in the secondary market at 99, 101 and 98 on December 31, 2007, 2008 and 2009,
respectively.
a. Sals investment in Pid Corporate bonds are held for trading purposes. (Downstream)
Books of intergroup issuer Books of intergroup investors WPEE

of debt P 155,543
July 1, 2007
Cr. Investment in FVTPL P 2,072,688
Dr. Interest expense P393,662 Dr. Investment in FVTPL P2,072,688
Dr. Premium on BP P106,338 Cr. Cash P2,072,688


Cr. Cash P500K
December 31, 2007

Dr. Premium on BP P110,060 Cr. Interest income P100K
Cr. Interest payable P500K

Cost P2,072,688
MV, 2007 P1,980,000
Loss 92,688


Dr. Premium on BP P113,912 Cr. Interest income P100,000 Cr. RE, beginning P 155,543
Cr. Cash P500K Cr. Investment in FVTPL P 2,072,688
December 31, 2008

Cr. RE, beg P 92,688



BV, beg P1,980,000 Dr. Interest income P 200,000
MV, 2008 P2,020,000 Cr. Premium on BP P 46,362

Gain 40,000



Cr. Cash P500K Cr. Investment in FVTPL P 2,072,688
December 31, 2009 Dr. Interest receivable P100K

Dr. Interest expense P373,704 Cr. Interest income P100K
Dr. Premium on BP 126,296
Cr. Interest payable P500K 
BV, beg P2,020,000
MV, 2009 P1,960,000
Loss 60,000


Cr. Investment in FVTPL P 60,000 Dr. Investment in FVTPL P 60,000


b. Pids investment in Sal Corporate bonds are held for trading purposes. (Upstream)

of debt P 155,543**
July 1, 2007
Dr. Interest expense P393,662 Dr. Investment in FVTPL P2,072,688
RE, end
Cr. Cash P500K
**WPEE net income effect NCI, end
December 31, 2007
Dr. Premium on BP P110,060 Cr. Interest income P100K Dr. Interest income P 100,000**
Cr. Interest payable P500K Cr. Interest expense P 77,988**
 Cr. Premium on BP P 22,012
Cost P2,072,688
MV, 2007 P1,980,000 Dr. Investment in FVTPL P 92,688
Loss 92,688 Cr. Loss from FVTPL valuation P 92,688**
Dr. Loss from FVTPL valuation P 92,688 Dr. Interest payable P100K
Cr. Investment in FVTPL P 92,688 Cr. Interest receivable P100K
RE, end


Cr. Cash P500K Cr. NCI, beginning P 31,109
December 31, 2008
Cr. NCI, beg P 18,538


BV, beg P1,980,000 Dr. Interest income P 200,000**
MV, 2008 P2,020,000 Cr. Premium on BP P 46,362
Gain 40,000 Cr. Interest expense P 153,638**
Dr. Gain from FVTPL valuation P 40,000**

RE, end

Cr. Cash P500K Cr. NCI, beginning P 31,109

Dr. Interest expense P373,704 Cr. Interest income P100K Dr. Investment in FVTPL P 52,688
Dr. Premium on BP 126,296 Cr. RE, beg P 42,150
Cr. Interest payable P500K Cr. NCI, beg P 10,538
BV, beg P2,020,000
MV, 2009 P1,960,000 Dr. RE, beg P 54,699
Loss 60,000 Dr. NCI, beg P 13,675

Dr. Interest income P 200,000**

Cr. Interest expense P 150,336**

Cr. Loss from FVTPL valuation P 60,000**


c. Sals investment in Pid Corporate bonds are classified as available for sale investments. (Downstream)

of debt P 155,543
July 1, 2007
Cr. Investment in AFS P 2,072,688
Dr. Interest expense P393,662 Dr. Investment in AFS P2,072,688
Cr. Cash P500K
December 31, 2007 Dr. Interest income P 93,271
Dr. Interest expense P389,940 Dr. Interest receivable P100,000 Cr. Interest expense P 77,988
Dr. Premium on BP P110,060 Cr. Interest income P93,271 Cr. Premium on BP P 22,012
Cr. Interest payable P500K Cr. Investment in AFS P6,729
Dr. Allowance - AFS valuation P 85,959

 Cr. UGL AFS valuation P 85,959
Amortized cost P2,065,959
MV, 2007 P1,980,000 Dr. Interest payable P100K
Allowance 85,959 Cr. Interest receivable P100K
Dr. UGL AFS valuation P 85,959

Cr. Allowance - AFS valuation P 85,959


Dr. Interest expense P386,088 Dr. Cash P100,000 Dr. Premium on BP P 228,231
Dr. Premium on BP P113,912 Cr. Investment in AFS P7,032 Cr. RE, beginning P 155,543
Cr. Cash P500K Cr. Interest income P92,968 Cr. Investment in AFS P 2,072,688
December 31, 2008

Dr. Interest expense P382,101 Dr. Interest receivable P100,000
Dr. Premium on BP P117,899 Cr. Investment in AFS P7,348

Amortized cost, beg P2,051,579
MV, 2008 P2,020,000
Allowance, end 31,579
Allowance, beg 85,959
Debit to allowance 54,380
Dr. Allowance AFS valuation P 31,579



Cr. Cash P500K Cr. Interest income P92,321 Cr. Investment in AFS P 2,072,688
December 31, 2009 Dr. Interest receivable P100,000

Dr. Interest expense P373,704 Cr. Investment in AFS P8,024
Dr. Premium on BP 126,296 Cr. Interest income P91,975


MV, 2009 P1,960,000
Credit to allowance 44,296

Cr. Allowance AFS valuation P 44,296

d. Sals investment in Pid Corporate bonds are classified as available for sale investments. (Upstream)

of debt P 155,543**
July 1, 2007
Dr. Interest expense P393,662 Dr. Investment in AFS P2,072,688
Cr. Cash P500K
December 31, 2007 Dr. Investment in AFS P 6,729

Dr. Interest expense P389,940 Dr. Interest receivable P100,000 Dr. Interest income P 93,271**
Dr. Premium on BP P110,060 Cr. Interest income P93,271 Cr. Interest expense P 77,988**
Cr. Interest payable P500K Cr. Investment in AFS P6,729 Cr. Premium on BP P 22,012

Amortized cost P2,065,959 Dr. Allowance - AFS valuation P 85,959
MV, 2007 P1,980,000 Cr. UGL AFS valuation P 85,959
Allowance 85,959

Dr. UGL AFS valuation P 85,959 Cr. Interest receivable P100K
Cr. Allowance - AFS valuation P 85,959
RE, end


Dr. Interest expense P386,088 Dr. Cash P100,000 Dr. Premium on BP P 228,231
Dr. Premium on BP P113,912 Cr. Investment in AFS P7,032 Cr. RE, beginning P 124,434
December 31, 2008
Dr. Interest expense P382,101 Dr. Interest receivable P100,000
Dr. Premium on BP P117,899 Cr. Investment in AFS P7,348


MV, 2008 P2,020,000
Debit to allowance 54,380

RE, end


December 31, 2009 Dr. Interest receivable P100,000
Dr. Interest expense P373,704 Cr. Investment in AFS P8,024
Dr. Premium on BP 126,296 Cr. Interest income P91,975

MV, 2009 P1,960,000
Credit to allowance 44,296
Cr. Allowance AFS valuation P 44,296
RE, end

What if the FVTPL bond was resold to third parties at the end of 2009?
July 1, 2009 <WPEE 1>

Dr. Interest expense P377,974 Dr. Cash P100K Dr. Bonds Payable P 2,000,000
Dr. Premium on BP P122,026 Cr. Interest income P100,000 Dr. Premium on BP P 228,231
Cr. Cash P500K Cr. RE, beginning P 155,543
<WPEE 2>
<WPEE 3>


<WPEE 4>
Note:
1. In the books of the issuer, there is no entry to account for mark to market the FVTPL on December 31, 2009
because the securities were sold at the end of the year.
2. Observe that there is no WPEE to eliminate the interest payable of P100,000. This is because as a result of the
sale, the interest payable on January 1, 2010 is no longer payable to an affiliate or intergroup investor. Also, the
intergroup investors interest receivable was derecognize as a result of the sale.
a. Sell at P2.1 Million plus interest.
December 31, 2009 However, from the point of view of the

consolidated entity, the sale of the FVTPL is not
No entry Sell bonds at P2.1 Million at accrued interest.
a sale but rather, a re-issuance of bonds.
Dr. Cash P 2.2 Million

<WPEE 5>
Cr. Investment in FVTPL P2,020,000
Dr. FVTPL P2,020,000
Cr. Interest receivable P 100,000
Dr. Trading gain P80,000
Cr. Trading gain P 80,000
Cr. Bonds Payable P2,000,000
Cr. Premium on BP P100,000

Bonds Payable Premium on Bonds Payable FVTPL

12/31/2009 12/31/2009 12/31/2009
P2,000,000 P 110,193 P0
WPEE 1 WPEE 5 WPEE 1 WPEE 4 WPEE 2 WPEE 1

P2,000,000 P2,000,000 P 228,231 P 49,664 P 52,688 P 2,072,688
Consolidated WPEE 5 WPEE 3 WPEE 5

Balance P100,000 P 68,374 P 2,020,000
P2,000,000
Consolidated Consolidated
Balance Balance
P100,000 P0
December 31, 2010
July 1, 2009 <WPEE 1>

Dr. Interest expense P377,974 Dr. Cash P100K Dr. Bonds Payable P 2,000,000
Dr. Premium on BP P122,026 Cr. Interest income P100,000 Dr. Premium on BP P 228,231
Cr. Cash P500K Cr. RE, beginning P 155,543
<WPEE 2>

<WPEE 3>
<WPEE 4>
Dr. RE, beg. P 49,664
<WPEE 5>
Dr. FVTPL P2,020,000
Dr. RE, beg P80,000
Cr. Bonds Payable P2,000,000
Cr. Premium on BP P100,000

Partially Owned Bonds

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Partially Owned Bonds

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Lesson 4.

3: Intercompany Sale of Bonds (Partially owned)

References: IFRS 3: Business Combination;

Consolidation Procedures (continuation)

For intercompany transactions:

Module 2: Accounting for Subsidiaries and Business Combinations

INTERCOMPANY SALE OF BONDS

Books of Issuer Books of Investor WPEE

Investors Classification: Held to Maturity (HTM)

Books of Issuer Books of Investor WPEE

Dr. Interest Expense Dr. Cash Dr. Interest Income

Dr. Interest Expense Dr. Interest Receivable Dr. Interest Payable

Module 2: Accounting for Subsidiaries and Business Combinations

Books of Issuer Books of Investor WPEE

Succeeding Years <mirror>

Mirror: Prior Years Journal Entries <mirror>

Current Years Journal Entries

Dr. Interest Expense Dr. Interest Receivable Dr. Interest Payable

Module 2: Accounting for Subsidiaries and Business Combinations

General Example - Investors Classification: Held to Maturity (HTM)

Books of intergroup issuer Books of intergroup Investor WPEE

Downstream Transaction Example - Investors Classification: Held to Maturity (HTM)

Module 2: Accounting for Subsidiaries and Business Combinations

Books of intergroup issuer Books of intergroup investor WPEE

Dr. Cash P10 Million Dr. Bonds Payable P 2 Million

December 31, 2007

Module 2: Accounting for Subsidiaries and Business Combinations

Books of intergroup issuer Books of intergroup investor WPEE

July 1, 2008 Dr. Bonds Payable P 2 Million

July 1, 2009 Dr. Bonds Payable P 2 Million

Dr. Investment in HTM P21,109

Module 2: Accounting for Subsidiaries and Business Combinations

Books of intergroup issuer Books of intergroup investor WPEE

Dr. Interest payable P100K

Upstream Transaction Example - Investors Classification: Held to Maturity (HTM)

Books of intergroup issuer Books of intergroup investor WPEE

Dr. Cash P10 Million Dr. Bonds Payable P 2 Million

July 1, 2007 Cr. Investment in HTM P 2,072,688

Module 2: Accounting for Subsidiaries and Business Combinations

Books of intergroup issuer Books of intergroup investor WPEE

December 31, 2007

July 1, 2008 Dr. Bonds Payable P 2 Million

December 31, 2008

Dr. Interest income P 185,620 RE, end

July 1, 2009 Dr. Bonds Payable P 2 Million

Module 2: Accounting for Subsidiaries and Business Combinations

Books of intergroup issuer Books of intergroup investor WPEE

Dr. Investment in HTM P21,109

Dr. Interest payable P100K

Downstream Transaction Example - Investors Classification: Held to Maturity (HTM)

Module 2: Accounting for Subsidiaries and Business Combinations

Books of intergroup seller Books of intergroup buyer WPEE

Dr. Cash P11,247,491 Dr. Bonds Payable P 2,000,000

July 1, 2008 Dr. Bonds Payable P 2,000,000

December 31, 2008

Module 2: Accounting for Subsidiaries and Business Combinations

Books of intergroup seller Books of intergroup buyer WPEE

Dr. Interest payable P100K

July 1, 2009 Dr. Bonds Payable P 2,000,000

December 31, 2009

Dr. Interest income P 184,297

Dr. Interest payable P100K

Module 2: Accounting for Subsidiaries and Business Combinations

Table 1: Issuers Valuation and Amortization Table