Financial Asset at Fair Value through Other Comprehensive Income
Problem 1 - Equity Securities
Borras “The Godmother” Company acquired the following equity securities:
December 31 2020
Warren Company
Jerome Company
Arthur Company
Total
Cost
P 200,000
400,000
600,000
P1,200,000
Market
P 120,000
280,000
650,000
P1,050,000
Gain (Loss)
(P 80,000)
( 120,000)
50,000
(P 150,000)
December 31 2021
Warren Company
Jerome Company
Arthur Company
Total
120,000
280,000
650,000
P1,050,000
220,000
300,000
580,000
P1,100,000
P
(
P
100,000
20,000
70,000)
50,000
The equity securities do not qualify as held for trading.
The entity has elected irrevocably to present changes in fair value through other comprehensive
income.
Prepare journal entries on December 31 2020 and December 31 2021.
2020
Dec 31
2021
Dec 31
Unrealized Loss - OCI
Financial Assets - FVOCI
P150,000
Financial Assets - FVOCI
Unrealized Loss - OCI
P50,000
P150,000
P50,000
The amount of P50,000 unrealized gain for the year 2021 is used to reverse the P150,000
unrealized loss from the previous year because unrealized gain (loss) will not be recorded or
recognized unless it goes higher or lower than the historical cost.
In this case, in 2020, the unrealized loss was P150,000 which lowered the carrying value
(cost) from P1,200,000 to P1,105,000.
For the following year 2021, the carrying value of the investment amounting to P1,105,000
was increased by P50,000, totalling to P1,155,000 which is still lower than the historical cost
of the investment. Thus, only a reversal entry was made to derecognize the previous
unrealized loss recorded.
Financial Asset at Fair Value through Other Comprehensive Income
Problem 2 - Debt Securities
Elijonah Company purchased equity securities during 2020 to be held as investments. The cost
and market value of investments are:
December 31 2020
Trading Securities
Securities not for Trading
Total
Cost
P2,000,000
3,000,000
P5,000,000
Market
P2,500,000
2,900,000
5,400,000
Gain (Loss)
P 500,000
( 100,000)
P 400,000
December 31 2021
Trading Securities
Securities not for Trading
Total
Cost
P2,500,000
2,900,000
P5,400,000
Market
P2,200,000
3,300,000
5,500,000
Gain (Loss)
(P 300,000)
400,000
P 100,000
The securities not held for trading are measured at fair value through other comprehensive
income by irrevocable election.
Prepare journal entries for 2020 and 2021.
2020
Dec 31
2021
Dec 31
Trading Securities - FVPL
Unrealized Gain - TS
P500,000
Unrealized Loss - OCI
Financial Asset - FVOCI
100,000
Unrealized Loss - TS
Trading Securities - FVPL
300,000
Financial Assets - FVOCI
Unrealized Loss - OCI
Unrealized Gain - OCI
400,000
P500,000
100,000
300,000
100,000
300,000
Note that the unrealized loss is a real account under equity, thus, it cannot have a balance at
the same time with unrealized gain. It must first be closed off before recognizing an unrealized
gain in the fair value of financial assets through other comprehensive income.
To make things simpler, the unrealized gain and loss (end of period) is often the difference
between the carrying value of investment less present fair value.
Financial Asset at Fair Value through Other Comprehensive Income
Problem 3 - Debt Securities
On January 1 2021, Sairus Company purchased 12% bonds with a face amount of P5,000,000
for P5,380,000. The bonds payable provide an effective yield of 10%.
The bonds are dated January 1 2021, mature on January 1 2026 and pay interest annually on
December 31 of the year.
The bonds are quoted at 120 on December 31 2021 and 115 on December 31 2022.
The entity has elected the fair value option for the bond investments.
Prepare journal entries for 2021 and 2022.
2021
Jan
Dec
1
31
Financial Assets - FVOCI
Cash
P5,380,000
P5,380,000
Cash
600,000
Interest Income
600,000
Interest Income for the year 2021
= face value of bonds x nominal rate
= P5,000,000 x 12%
= P600,000
Amortization schedule:
Date
Collections
Interest Income
Amortization
Jan 1 2021
Carrying Value
P 5,380,000
Dec 31 2021
P 600,000
P 538,000
P 62,000
5,318,000
Dec 31 2022
600,000
531,800
68,200
5,249,800
Dec 31 2023
600,000
524,980
75,020
5,174,780
Dec 31 2024
600,000
517,478
82,522
5,092,258
Dec 31 2025
600,000
509,225.8
90,774.2
5,001,483.8
Financial Asset at Fair Value through Other Comprehensive Income
31
Interest Income
Financial Asset - FVOCI
62,000
Financial Asset - FVOCI
Unrealized Gain - OCI
682,000
62,000
682,000
Unrealized gain
= face value of bonds x quotation for current year - present carrying value
= P5,000,000 x 120% - P5,318,000
= P6,000,000 - P5,318,000
= P682,000
2022
Dec
31
Cash
600,000
Interest Income
31
600,000
Interest Income
Financial Asset - FVOCI
68,200
Unrealized Gain - OCI
Financial Asset
181,800
68,200
181,800
Unrealized gain (loss)
= face value of bonds x quotation for current year - present carrying value
= P5,000,000 x 115% - (P6,000,000 - P68,200)
= P5,750,000 - P5,931,800
= (P181,800)