FINANCIAL ASSETS AT AMORTIZED COST
THEORIES
1.
Bond
A.
B.
C.
D.
2. Which
A.
B.
C.
D.
investments held for collection are reported at
Fair value
Amortized cost
Net realizable value
The lower of amortized cost and fair value
of the following statements is correct about the effective interest method of amortization?
Amortization of discount decreases from period to period.
Amortization of premium increases from period to period.
The effective interest method applied to bond investments is different from that applied to bonds payable.
The effective interest method applies the effective interest rate to the beginning carrying amount for each interest period.
3.
If there is objective evidence that an impairment loss on financial asset measured at amortized cost has been incurred, the
amount of loss is measured as the difference between the
A. carrying amount and the absolute amount of estimated cash flows.
B. carrying amount and the present value of estimated cash flows discounted at the original effective interest rate.
C. carrying amount and the present value of estimated cash flows discounted at the current market rate of interest.
D. absolute amount of estimated cash flows and present value of estimated cash flows discounted at the original effective
interest rate.
4.
The fair value option allows an entity to
A. Record income when the fair' value of the investment increases.
B. Value the debt investments at fair value in some years but not in other years.
C. Report financial instruments at fair value by recording gains and losses as a separate component of other comprehensive
income.
D. All of these are true with respect to the fair value option.
5. True or False
I. Credit risk - This is the risk that one party to a financial instrument will cause a financial loss for the other party by failing
to discharge an obligation.
II. Liquidity risk - This is the risk that an entity will encounter difficulty in meeting obligations associated with a financial
liability.
III. Market risk - This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices. Market risk comprises three types of risk, name) currency risk, interest
rate risk and price risk.
A. True;True;True B. False;True;True
C. False;False;True
D. True;False;True
B
D
B
A
A
PROBLEMS
Problem 1: (Effective interest method) On January 1,Year 1 Abu Company acquired 5-year, 15%, P8,000,000 face value bonds
for P8,274,646. Based on the company’s business model and the contractual cash flow collectible from this instrument, Abu
Company designates the bonds as bond investments at amortized cost. Interest on the bonds is payable annually on December
31.The investments were acquired at a price to yield 14%.Present value of an annuity of P1 at 14%for 5 periods is 3.43308.
REQUIRED:
(a) Prepare a schedule of amortization using the effective interest method of amortization.
(b) Prepare journal entries for Year 1 and Year 2.
(a)Date
01/01/Year 1
12/31/Year 1
12/31/Year 2
12/31/Year 3
12/31/Year 4
12/31/Year 5
*rounded off.
(b)
Year 1
Jan. 1
Dec. 31
Year 2
Dec. 31
Interest
Received
Interest Revenue
Premium
Amortization
1,200,000
1,200,000
1,200,000
1,200,000
1,200,000
1,158,450
1,152,633
1,146,002
1,138,442
1,129,827*
41,550
47,367
53,998
61,558
70,173*
Debt Investments at Amortized Cost
Cash
Cash
Debt Investments at Amortized Cost
Interest Revenue
Cash
Debt Investments at Amortized Cost
Interest Revenue
Financial assets at amortized cost
8,274,646
1,200,000
1,200,000
Carrying Value
8,274,646
8,233,096
8,185,729
8,131,731
8,070,173
8,000,000
8,274,646
41,550
1,158,450
47,367
1,152,633
Page 1 of 10
Problem 2: (Investment in Bonds-at PL-vs OCI-vs amortized cost)
On January 1, 20x2, Bella Corporation purchased
P1,000,000 8% bonds for P924,164 (including broker’s commission of P50,000). The bonds were purchased to yield 10%. Interest is
payable annually every January 1. The bonds mature on January 1, 20x7.
Quoted price of the bonds as of dates indicated follows:
December 31, 20x2
December 31, 20x3
98.0
99.0
REQUIRED:
A. Prepare the journal entries on the books of Bella Corporation to record the following: (Round off present value factors to four
decimal places)S
1. Purchase of the investment on January 1, 20x2;
2. Accrual of interest income on December 31, 20x2;
3. Amortization of premium or discount on December 31, 20x2; and
4. Fair value adjustment as of December 31, 20x2
Under the following assumptions:
a. The investment is designated as FA @ FVTPL;
b. The investment is available-for-sale; and
c. The investment is held-to-maturity
B.
a.
b.
c.
Compute for the carrying amount of the investment in bonds at December 31, 20x2 if:
The investment is designated as FA @ FVTPL;
The investment is available-for-sale; and
The investments is held-to-maturity
C. On December 31, 20x3, the entire bonds were sold plus accrued interest.
Solution Guide:
Requirement A
FA@FVTPL
Available for Sale (AFS) (FA @ OCI)
Held to Maturity (HTM)
A.1) Purchase of investment:
FA@FVTPL
P874,164
Commission exp.
Cash
AFS securities
50,000
P924,164
Cash
HTM securities
P924,164
P924,164
Cash
P924,164
P924,164
A.2) Accrual of interest:
Interest receivable
P80,000
Interest income
Interest receivable
P80,000
P80,000
Interest income
Interest receivable
P80,000
P80,000
Interest income
P80,000
A.3) Amortization of discount (see
schedule below):
No entry
AFS securities
P12,416
Interest income
HTM securities
P12,416
P12,416
Interest income
P12,416
A.4) FV adjustment:
FA@FVTPL
P105,836*
FV adj. gain (P/L)
P105,836
AFS securities
P43,420**
FV adj. G/L (OCI)
P43,420
* (P980,000 - P874,164)
** (P980,000 - P936,580)
No entry
Requirement B
Carrying amount, 12/31/x2
FA@FVTPL
Fair value
P980,000
Available for Sale (AFS)
Fair value
P980,000
Held to Maturity (HTM)
Amortized cost
P936,580
Financial assets at amortized cost
Page 2 of 10
Requirement C
FA@FVTPL
Available for Sale (AFS)
To update amortization
To update amortization
No entry
AFS securities
Held to Maturity (HTM)
To update amortization
P13,658
HTM securities
Interest income
P13,658
P13,658
Interest income
P13,658
FV adjustment before sale
FV adjustment before sale
FV adjustment before sale
No entry
FV adj. G/L (OCI)
No entry
P3,658*
AFS securities
P3,658
* (P990,000 - P993,658)
Disposal entry
Cash
P1,070,000
FA@FVTPL
P980,000
Disposal entry
Disposal entry
Cash
P1,070,000
FV adj. G/L (OCI)
39,762
Cash
P1,070,000
HTM securities
P950,238
Interest income
80,000
AFS securities
Gain on sale of TS
10,000
Interest income
Gain on sale of AFS (P/L)
P990,000
80,000
39,762
Interest income
80,000
Gain on sale of
39,762
Amortization schedule:
Date
EI (10%)
NI (8%)
Disc. Amort.
12/31/20x2
P92,416
P80,000
P12,416
936,580
12/31/20x3
93,658
80,000
13,658
950,238
12/31/20x4
95,024
80,000
15,024
965,262
12/31/20x5
96,526
80,000
16,526
981,788
12/31/20x6
98,212
80,000
18,212
1,000,000
1/1/20x2
Amortized cost
P 924,164
Problem 3: (Serial Bonds) On January 1, 2010, Jessa Company purchased serial bonds with face value of P3,000,000 and stated
12% interest payable annually every December 31. The bonds are to be held to maturity with a 10% effective yield. The bonds
mature at an annual installment of P1,000,000 every December 31. The rounded present value of 1 at 10% for:
One period
0.91
Two periods
0.83
Three periods
0.75
Required:
a. What is the purchase price of the serial bonds on January 1, 2010?
b. Prepare the journal entries in 2010.
Principal
Interest
1,000,000 360,000
1,000,000 240,000
1,000,000 120,000
Requirement (b):
1/1/x1
Investment in bonds
Cash
12/31/x1
Cash
Interest income
Investment in bonds
1,360,000 x
1,240,000 x
1,120,000 x
3,106,800
1,360,000
Financial assets at amortized cost
0.91
0.83
0.75
1,237,600
1,029,200
840,000
3,106,800
3,106,800
310,680
1,049,320
Page 3 of 10
Problem 4: (Reclassification of financial assets) The table below serves as guide in accounting for reclassification:
From
To
Adjustment
Amortized cost
Fair value through profit or loss
Difference between FV and amortized cost
is taken to profit or loss
Amortized cost
Fair value through other comprehensive Difference between FV and amortized cost
income
is taken to other comprehensive
income;
Fair value through profit or loss
Fair value through other comprehensive
income
Fair value through profit or loss
Amortized cost
Fair value through other comprehensive
income
Amortized cost
Fair value through other comprehensive
income
Fair value through profit or loss
Effective interest rate is not adjusted
Effective
interest
rate
shall
be
calculated based on fair value on
reclassification date
Fair value on date of reclassification is the
initial amortized cost.
Calculate an
effective interest rate
The effective interest rate is not
adjusted.
The amount accumulated in equity is
removed to adjust the asset to
amortized cost, as if it had been
designated at amortized cost from date of
initial recognition
Transfer the cumulative unrealized gains
and losses in OCI to profit or loss
Debt investments at amortized cost
xxx
Unrealized gain on debt investment
xxx
Debt investment at FV through OCI
xxx
Fair value adjustment-Debt investment
xxx
Reclassification shall be made prospectively from the reclassification date. The reclassification date as defined by IFRS 9 is the first
day of the first reporting period following the change in business model. Such reclassification is considered to be very infrequent.
Financial assets that are irrevocably designated or initial recognition as fair value through profit or loss. These financial assets
are measured at fair value through profit or loss “by irrevocable designation” or “by option”. This fair value option is applicable to
investments it bonds and other debt instruments which can be irrevocably designated as at fair value through profit or loss even if
the financial assets satisfy the amortization cost measurement.
This irrevocably designation is the fair value option allowed in accordance with par.4.1.5 of PFRS 9.
Case A: ABC Co. changes its business model and determines the following information:
Carrying amount of financial assets under previous classification
Fair value on reclassification date (January 1, 20X3)
P100,000
120,000
Requirements: Provide the entry (entries) on reclassification date under the following scenarios:
a. Amortized cost to FVPL
b. FVPL to Amortized cost
c. Amortized cost to FVOCI (mandatory)
d. FVOCI (mandatory) to Amortized cost – the cumulative balance of gain previously recognized in equity amount to P5,000.
e. FVPL to FVOCI (mandatory)
f. FVOCI (mandatory) to FVPL – the cumulative balance of gain previously recognized in equity amount to P5,000
Solution Guide:
Scenario (a): Amortized cost to FVPL
Jan.
1, FVPL asset
20x3
Amortized cost asset
Gain on reclassification (squeeze)
Scenario (b): FVPL to Amortized cost
Jan.
1, FVPL asset
20x3
Unrealized gain – P/L
Jan.
1, Amortized cost asset
20x3
FVPL asset
Scenario (c): Amortized cost to FVOCI (mandatory)
Jan. 1, 20x3 FVOCI asset
Amortized cost asset
Gain on reclassification – OCI
Scenario (d): FVOCI (mandatory) to Amortized cost
Jan. 1, 20x3 FVOCI asset
Unrealized gain – OCI
Jan. 1, 20x3 Amortized cost asset (squeeze)
Unrealized gain – OCI (5K + 20K)
FVOCI asset(FV on reclassification date)
Scenario (e): FVPL to FVOCI (mandatory)
Jan.
1, FVPL asset
20x3
Unrealized gain – P/L
Jan.
1, FVOCI asset
20x3
FVPL asset
Financial assets at amortized cost
120,000
20,000
120,000
120,000
20,000
95,000
25,000
20,000
120,000
100,000
20,000
20,000
120,000
100,000
20,000
20,000
120,000
20,000
120,000
Page 4 of 10
Scenario (f): FVOCI (mandatory) to FVPL
Jan. 1, FVOCI asset
20x3
Unrealized gain – OCI
Jan. 1, FVPL asset
20x3
FVOCI asset
Jan. 1, Unrealized gain – OCI
20x3
Gain on reclassification – P/L
20,000
120,000
25,000
20,000
120,000
25,000
"Reclassification" of financial assets.
PFRS 9, paragraph 4.4.1, provides that an entity shall reclassify financial assets only when it changes its business model for
managing the financial assets. Where reclassification occurs, Paragraph 5.6.1 provides that an entity shall apply the reclassification
prospectively from the reclassification date. The entity shall not restate any previously recognized gains, losses and interest.
As defined in Appendix A of PFRS 9, the "reclassification date" is the first day of the reporting period following the change in business
model that results in an entity reclassifying financial asset. This means that if the change in business model is in 2013, the
reclassification date is January 1, 2014, the first day of the next reporting period. However, the entity must disclose the change in
business model in the 2013 financial statements because the change in the entity's business model is a significant and demonstrable
event. The Application Guidance B4.4.1 of PFRS 9 makes it clear that changes in an entity's business model in managing its financial
assets are expected to be infrequent.
Reclassification of financial asset "from fair value to amortized cost".
PFRS 9, paragraph 5.6.3, provides that when an entity reclassifies a financial asset at fair value to financial asset at amortized cost,
the fair value at the reclassification date becomes the new carrying amount of the financial asset at amortized cost.
The difference between the new carrying amount of the financial asset at amortized cost and the face value of the financial asset
shall be amortized through profit or loss over the remaining life of the financial asset using the effective interest method.
Case B: On January 1, 20X1, ABC Co. acquired 10%, P2,000,000 bonds for P1,903,926. The principal is due on January 1, 20X4
but interest is due annually starting December 31, 20X1. The yield rate on the bonds is 12%. The bonds were classified as
investment measured at amortized cost.
On September 1, 20X2, ABC Co. changed its business model. It was ascertained that the investment should be reclassified to held
for trading securities. The quoted prices were 101, 103 and 104 on September 1, 20X2, December 31, 20X2 and January 1, 20X3,
respectively.
Requirements:
a. When is the reclassification date?
b. Provide the journal entry on reclassification date.
Requirement (a): Reclassification date
The reclassification date is January 1, 20x3.
Requirement (b): Journal entry on reclassification date
Date
Interest received
Interest income
Amortization
Present value
Dec. 31, 20x1
200,000
228,471
28,471
1,932,398
Dec. 31, 20x2
200,000
231,888
31,888
1,964,286
Dec. 31, 20x3
200,000
235,714
35,714
2,000,000
Jan. 1, 20x1
Jan. 1, 20x3
1,903,927
Held for trading securities
(2M x 104%)
Investment in bonds at
amortized cost
Gain on reclassification
2,080,000
1,964,286
115,714
Problem 5: (Fair value Option) On January 1, 20x6, ABC Company purchase 12% bonds with face amount of P5,000,000 for
P5,380,000. The bonds provide an effective yield of 10%. The bonds are dated January 1, 20x5, mature on January 1, 2021 and
pay interest annually on December 31 on each year. The bond are quoted at 120 on December 31, 20x6. The entity has elected the
fair value option for the bond investment. What total income should be reported for 20x6?
Answer
5,000,000 x 120 = 6,000,000 – 5,380,000
Interest income (5M x 12%)
Financial assets at amortized cost
P620,000 gain from change in FV
600,000
P1,220,000
Page 5 of 10
Problem 6: (Impairment Loss)
IFRS 9 offers two approaches:
1. General model for measuring a loss allowance:
This model recognizes loss allowance depending on the stage in which the financial asset is. There are 3 stages:
o Stage 1 – Performing assets: Loss allowance is recognized in the amount of 12-month expected credit loss;
o Stage 2 – Financial assets with significantly increased credit risk: Loss allowance is recognized in the
amount of lifetime expected credit loss, and
o Stage 3 – Credit-impaired financial assets: Loss allowance is recognized in the amount of lifetime expected
credit loss and interest revenue is recognized based on amortized cost.
2. Simplified model:
You don’t need to determine the stage of a financial asset, because a loss allowance is recognized always at a lifetime
expected credit loss.
Impairment
Impairment of financial assets is recognised in stages:
Stage 1—as soon as a financial instrument is originated or purchased, 12-month expected credit losses are recognised in profit or
loss and a loss allowance is established. This serves as a proxy for the initial expectations of credit losses. For financial assets,
interest revenue is calculated on the gross carrying amount (ie without deduction for expected credit losses).
Stage 2—if the credit risk increases significantly and is not considered low, full lifetime expected credit losses are recognised in
profit or loss. The calculation of interest revenue is the same as for Stage 1.
Stage 3—if the credit risk of a financial asset increases to the point that it is considered credit-impaired, interest revenue is
calculated based on the amortised cost (ie the gross carrying amount less the loss allowance). Financial assets in this stage will
generally be assessed individually. Lifetime expected credit losses are recognised on these financial assets.
Case 1: (Expected credit losses) ABC Co. acquires bonds with face amount of P100,000 at fair value of P100,000. The effective
interest rate is 10%, equal to the nominal interest rate. ABC Co. classifies the bonds as subsequently measured at FVOCI.
All the reporting date, the fair value of the bonds decreases to P90,000. ABC Co. estimates expected credit losses equal to 12month expected credit losses of P3,000.
Requirements: Prepare the year-end journal entries to recognize the impairment loss and to accrue the interest income for the
year (assume 1-year interest).
Dec. 31, 20x1
Dec. 31, 20x1
Impairment loss – P/L
Unrealized loss – OCI
Investment in bonds – FVOCI
Interest receivable
Interest income
3,000
7,000
10,000
10,000
10,000
Case 2: (Impairment and Reversal – PFRS 9) On January 1, 20x6, Albay Company acquired 12% P2,000,000 face amounts
bonds for P2,126,776. The bonds mature on December 31, 20x9. The bonds were acquired to yield 10%. Interest is payable on
December 31. The bonds are to be classified as financial asset at amortized cost.
On December 31, 20x7, after receiving the interest, the issuer of the financial instrument is in financial difficulties and it becomes
probable that an impairment loss is in financial difficulties and it becomes probable that an impairment loss should be recorded. The
Financial assets at amortized cost
Page 6 of 10
company assesses that only principal amount will be received on the maturity date. The prevailing rate of interest on this date is
11%.
On December 31, 20x8, the financial condition of the borrower has improved and that it can pay its unpaid obligation including
principal and interest at maturity. The prevailing rate of interest on this date is 12%.
The following present value factors are available:
PV of 1
@10% @11% @12%
One period
.9091
.9009
.8929
Two periods
.8264
.8116
.7972
Three periods
.7513
.7312
.7118
Four periods
.6830
.6587
.6355
Required:
1. Compute for the following :
a. Impairment loss on December 31, 20x7.
b. Carrying amount on December 31, 20x7.
c. Interest income in 20x8.
d. Gain on reversal of impairment loss in 20x8.
e. Carrying amount on December 31, 20x8.
f. Interest income in 20x9.
2. Prepare journal entries in 20x7 starting with the impairment loss and 20x9.
Original Amortization Table:
Date
Interest collection
1/1/20x6
12/31/20x6
12/31/20x7
12/31/20x8
12/31/20x9
Interest income
Premium
amortization
P212,678
209,945
206,940
203,634
P27,322
30,055
33,060
36,339
P240,000
240,000
240,000
240,000
Requirement No. 1a
Carrying amount, 12/31/20x7
Less: PV of expected cash flows using original effective rate (P2M x .8264)
Impairment loss
Present value
P2,126,776
2,099,454
2,069,399
2,036,339
2,000,000
P2,069,399
1,652,800
P416,599
Requirement No. 1b
After recording the impairment loss, the following revised amortization table is prepared using the original effective rate.
Date
Interest income
Present Value
12/31/20x7
P1,652,800
12/31/20x8
P165,280
1,818,080
12/31/20x9
181,808
2,000,000
The amortized cost is the present value in the amortization table less allowance for impairment loss.
Gross carrying amount (original amortization table)
Less: Allowance for credit loss, 12/31/20x7
Amortized cost, 12/31/20x7
P2,069,399
(416,599)
P1,652,800
Requirement No. 1c
As provided under PFRS 9 paragraph 5.4.1, the interest income should be computed by multiplying the original effective rate to the
amortized cost of the credit-impaired financial asset.
Amortized cost-12/31/20x7
P1,652,800
Multiply by: Original effective rate
10%
Interest income
P165,280
Requirement No. 1d
Principal
Add: Accrued interest (P2M x 12% x 2 years remaining unpaid interest)
Total
Multiply: Present value of 1 using original effective rate
Total present value of future cash inflows
Compared with would have been CV-no impairment
P2,000,000
480,000
P2,480,000
.9091
P2,254,568
P2,036,339
Lower figure
Less: Amortized cost, 12/31/20x8 (revised amortization table)
Gain on reversal of impairment
P2,036,339
1,818,080
P218,259
Requirement No. 1e
Carrying amount – 12/31/20x8 (revised amortization table)
Add: Impairment reversal
Amortized Cost – 12/31/20x8 (original amortization table)
Requirement No. 1f
Gross carrying amount, 12/31/20x8
Multiply by: original effective rate
Interest income, 20x9
P1,818,080
218,259
P2,036,339
2,036,339
10%
203,634
Requirement No.2
Journal entries are:
12/31/20x7
Financial assets at amortized cost
Page 7 of 10
Impairment loss
Investment in bonds-FAAC
To record the impairment loss
P416,599
P416,599
12/31/20x8
Investment in bonds-FAAC
Interest income (P1,652,800 x 10%)
To record the interest income
165,280
165,280
Investment in bonds-FAAC
Gain on reversal of impairment loss
To record the reversal of impairment loss
218,259
218,259
12/31/20x9
Cash
Investment in bonds-FAAC
Interest income
To record the interest income
240,000
36,336
203,634
Cash
Investment in bonds-FAAC
To record collection of principal
2,000,000
2,000,000
Problem 7: (Investment in bonds with detachable warrants) ABC Co. acquired investment in bonds with detachable warrants
for P1,050,000. The bonds have a face amount of P1,000,000. Without the detachable warrants, the bonds are selling at P950,000.
The detachable warrants have a fair value P100,000. ABC Co.’s business model requires debt instruments to be measured at
amortized cost and equity instruments at fair value.
Required: Prepare the necessary journal entries.
Notes:
1. The investment in bonds and share warrants are initially recognized at fair values. The fair value of financial assets on initial
recognition is usually equal to the transaction price.
2. Upon exercise of the share warrants, the newly acquired investment is recognized at fair value and the carrying amount of the
share warrants exercised is derecognized.
3. Upon expiration, the carrying amount of the share warrants is written-off as loss.
a. The entry to record the acquisition
Investment in bonds at amortized cost
Investment in share warrants at FVPL
Cash
P950,000
100,000
P1,050,000
b. Case 1: sale of warrants: Assume that the detachable warrants are subsequently sold for P120,000.
The entry to record the sale is as follows:
Cash
P120,000
Investment in share warrants at FVPL
Gain on sale (squeeze)
P100,000
20,000
c. Case 2: Exercise of warrants: Assume the detachable warrants are subsequently exercised and the purchase price of the
newly acquired shares is P1,000,000. The acquired shares are classified as held for trading securities.
The entry to record the exercise is as follows:
To recognize the newly acquired investment.
Held for trading securities
P1,000,000
Cash
P1,000,000
To derecognize the carrying amount of the share warrants exercised.
Loss on derecognition of asset –P/L
Investment in share warrants at FVPL
P100,000
P100,000
c. Case 3: Expiration of warrants: Assume the detachable warrants expired.
The entry to record the expiration of the warrants is as follows:
Loss on expiration of share warrants
Investment in share warrants at FVPL
P100,000
P100,000
Trade date accounting – under the trade date accounting, the financial asset and liability are recognized on the date the enterprise
commits to purchase.
Settlement date accounting – under the settlement date accounting, the financial asset is recognized on the date it is delivered.
Recognize
Derecognize
Changes in fair value from trade date
to settlement date (for financial
assets measured at fair value):
Purchase
Sale
Financial assets at amortized cost
Trade Date
Commitment date
Commitment date
Settlement Date
Delivery date
Delivery date
Recognize
Ignore
Recognize
Ignore
Page 8 of 10
Problem 8: (Trade Date Accounting and Settlement Date Accounting-Purchase Transaction)On December 29, 20X1, ABC
Co. acquires 1,000 units of an investment through a broker at P1.00 per unit, the quoted price on this date. Ownership over the
financial asset transfers to ABC Co. on January 3, 20X2. The fair values per unit on December 31, 20X1 and January 3, 20X2 are
P1.75 and P1.50, respectively.
Requirements: Provide the journal entries under the trade date accounting and the settlement date accounting assuming the
financial asset purchased is classified as subsequently measured at:
a. FVPL
b. FVOCI
c. Amortized cost
With Suggested Answers:
Requirement (a) Held for trading securities
Date
Trade date accounting
Dec. 29,
Held for trading securities
1,000
20x1
Accounts payable
1,000
Settlement accounting
No entry
to record the purchase of investment
Dec. 31,
20x1
Jan. 3,
20x2
Held for trading securities
Unrealized gain – P/L
750
750
Accounts receivable
Unrealized gain – P/L
to record the fair value change
Unrealized loss – P/L
250
Accounts payable
1,000
Held for trading securities
Cash in bank
Held for trading securities 1,500
Unrealized loss – P/L
250
Accounts receivable
750
Cash in bank
1,000
250
1,000
Requirement (b) FVOCI securities
Date
Trade date accounting
Dec. 29,
FVOCI securities
1,000
20x1
Accounts payable
1,000
to record the purchase of investment
Settlement accounting
No entry
to record the purchase of investment
Jan. 3,
20x2
FVOCI securities
Unrealized gain – OCI
750
750
Accounts receivable
750
Unrealized gain – OCI
750
to record the fair value change
to record the fair value change
Unrealized loss – OCI
Accounts payable
FVOCI securities
Cash in bank
FVOCI securities
Unrealized loss – OCI
Accounts receivable
Cash in bank
250
1,000
250
1,000
to record the settlement of the purchase transaction
Requirement (c) Amortized cost
Date
Trade date accounting
Dec. 29,
Investment in bonds 1,000
20x1
Accounts payable
1,000
1,000
1,000
to record the settlement of the purchase transaction
750
1,000
Settlement accounting
No entry
No entry
Accounts payable
Cash in bank
1,500
250
to record the purchase of investment
to record the purchase of investment
Dec. 31,
20x1
Jan. 3,
20x2
750
to record the fair value change
to record the settlement of the purchase transaction
Dec. 31,
20x1
750
No entry
Investment in bonds
Cash in bank
1,000
1,000
to record the purchase of investment
Problem 8: (Trade Date Accounting and Settlement Date Accounting-Sale Transaction) On December 29, 20X1, ABC Co.
sells 1,000 units of an investment through a broker at P1.00 per unit, the quoted price on this date. The investment has a carrying
amount of P1,200. Ownership over the financial asset transfers to the buyer on January 30, 20X2. The fair values per unit on
December 31, 20X1 and January 3, 20X2 are P1.75 and P1.50, respectively.
Requirements: Provide the journal entries under the trade date accounting and the settlement date accounting assuming the
financial asset sold was classified as subsequently measured at:
a. FVPL
b.1 FVOCI (mandatory-Debt)
c. Amortized cost
b.2 FVOCI -Equity
With Suggested Answers:
Requirement (a) Held for trading securities
Date
Trade date accounting
Dec. 29,
Accounts receivable
1,000
20x1
Realized loss on sale
200
Held for trading securities
1,200
Financial assets at amortized cost
Settlement accounting
Unrealized loss – P/L
200
Held for trading securities
200
to adjust the carrying amount of the investment sold to
Page 9 of 10
to derecognize the investment sold and to recognize the
gain on disposal
Dec. 31,
20x1
Jan. 3,
20x2
No entry
Cash
1,000
Accounts receivable
1,000
to record the settlement of the sale transaction
Requirement (b1) FVOCI Debt securities
Date
Trade date accounting
Dec. 29,
Accounts receivable 1,000
20x1
Realized loss on sale
200
FVOCI securities
1,200
to derecognize the investment sold and to recognize the
gain on disposal
Dec. 31,
20x1
Jan. 3,
20x2
fair value as of trade date
No entry
Cash
1,000
Held for trading securities
to derecognize the investment sold and to record the
settlement of the sale transaction
Settlement accounting
Unrealized loss – OCI
200
FVOCI securities
200
to adjust the carrying amount of the investment sold to fair
value as of trade date
No entry
Cash
1,000
Accounts receivable
1,000
to record the settlement of the sale transaction
1,000
No entry
Cash
FVOCI securities
1,000
1,000
to derecognize the investment sold and to record the
settlement of the sale transaction
Retained earnings
Realized loss on sale
200
200
to transfer the accumulated unrealized gain to profit or
loss as a reclassification adjustment
Requirement (b2) FVOCI equity securities
Date
Trade date accounting
Dec. 29,
Accounts receivable 1,000
20x1
Retained earnings
200
FVOCI securities
1,200
to derecognize the investment sold and to recognize the
gain on disposal
Dec. 31,
20x1
Jan. 3,
20x2
Settlement accounting
Unrealized loss – OCI
200
FVOCI securities
200
to adjust the carrying amount of the investment sold to fair
value as of trade date
No entry
No entry
Cash
1,000
Accounts receivable
1,000
Cash
FVOCI securities
to record the settlement of the sale transaction
to derecognize the investment sold and to record the
settlement of the sale transaction
Retained earnings
Unrealized loss -OCI
1,000
1,000
200
200
to transfer the accumulated unrealized gain to profit or
loss as a reclassification adjustment
Requirement (c) Amortized cost
Date
Trade date accounting
Dec. 29,
Accounts receivable 1,000
20x1
Realized loss on sale
200
Investment in bonds
1,200
Settlement accounting
No entry
to derecognize the investment sold and to recognize the
gain on disposal
Dec. 31,
20x1
Jan. 3,
20x2
No entry
Cash
1,000
Accounts receivable
1,000
to record the settlement of the sale transaction
Financial assets at amortized cost
No entry
Cash
1,000
Realized loss on sale
200
Investment in bonds
1,200
to derecognize the investment sold, to record the settlement
of the sale transaction and to recognize the gain on disposal
Page 10 of 10