PROBLEMS
RECLASSIFICATION OF
FINANCIAL ASSET
ACFAR 2233 INTERMEDIATE ACCOUNTING 2
LEOPOLDO D. MEDINA, CPA, MSA
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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PROBLEM 1 FVOCI to AC (4)
On January 1, 2020 CD Company purchased bonds with face amount of
P5,000,000. The entity paid P4,500,000 plus transaction cost of P168,600.
The bonds mature on December 31, 2023 and pay 6% interest annually on
December 31 of each year with 8% effective yield.
The bonds are quoted at 105 on December 31, 2020 and 110 on December
31, 2021.
The business model in managing the financial asset is to collect contractual
cash flows and also to sell the bonds in the open market. The entity has not
elected the fair value option.
On December 31, 2021, the entity changed the business model to collect only
contractual cash flows. On December 31, 2022, the bonds are quoted at 115
and the market rate of interest is 10%.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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Required:
1. Prepare a table of amortization using the effective interest method.
2. Compute the unrealized gain for 2020.
3. Compute the unrealized gain for 2021.
4. Prepare journal entries for 2020, 2021 and 2022.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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FVOCI TO AC (4)
1The FV at reclassification date becomes the new amortized cost CA
2The cumulative gain or loss previously recognized in OCI is ELIMINATED
and adjusted against the FV at reclassification date
Meaning, the investment is REVERTED BACK to AC measurement.
3The original ER is NOT adjusted
(1)
Date
Interest
Interest
DISCOUNT
Carrying
received
income
Amortization
Amount
1.1.20
(2)
4,668,600
12.31.20
300,000
373,488
73,488
4,742,088
12.31.21
300,000
379,367
79,367
4,821,455
12.31.22
300,000
385,716
85,716
4,907,171
12.31.23
300,000
392,829
92,829
5,000,000
CA 12.31.20
*
MV
5M x 105%
4,742,088
5,250,000
increased by 507,912
this is Unrealize gain - OCI for 2020
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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(3)
For CA 12.31.21, do not use the CA per amortization table
CA 12.31.21
MV
5,250,000
5M x 110%
79,367
5,329,367
5,500,000
increased by 170,633
this is Unrealized gain- OCI for 2021
On this date, the cumulative UG - OCI is
507,912
170,633
678,545
(4)
2020
1.1.20
Financial asset - FVOCI
4,688,600
Cash
12.31.20
4,688,600
Cash
300,000
Financial asset - FVOCI
73,488
Interest income
Financial asset - FVOCI
Unrealized gain - OCI
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
373,488
507,912
507,912
6
2021
12.31.21
Cash
300,000
Financial asset - FVOCI
79,367
Interest income
379,367
Financial asset - FVOCI
170,633
Unrealized gain - OCI
170,633
2022Since the change in business model in on 12/31/21,
the reclassification date is January 1, 2022
1.1.22
Investment in bonds
5,500,000
Financial asset - FVOCI
5,500,000
Unrealized gain - OCI
678,545
Investment in bonds
678,545
Investment in bonds
5,500,000
678,545
4,821,455
*
Note : on this date, the CA of
investment is equal to the CA per
amortization table.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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12.31.22 Cash
Investment in
bonds
Interest
income
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
300,000
85,716
385,716
8
PROBLEM 2 AC to FVOCI (3)
On January 1, 2020, MN Company purchased bonds with face amount of
P2,000,000 for P1,900,500 including transaction cost of P100,500.
The business model for this investment is to collect contractual cash flows which
are solely payments of principal and interest. The entity did not elect the fair
value option.
The bonds mature on December 31, 2022 and pay 8% interest annually every
December 31 with a 10% effective yield.
On December 31, 2020, the entity changed the business model for this
investment to collect contractual cash flows and to sell the financial asset in the
open market.
The bonds are quoted at 110 on January 1, 2021 and 120 on December 31,
2021.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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Required:
1. Prepare a table of amortization using the affective interest method.
2. Compute the unrealized gain for 2021.
3. Prepare journal entries for 2020 and 2021.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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AC TO FVOCI (3)
1The financial asset is measured at FV at reclassification date.
2The difference between the amortized cost carrying amount and the FV at
reclassification date is recognized in OCI.
3The original ER is NOT adjusted
(1)
Date
Interest
received
1.1.20
12.31.20
12.31.21
12.31.22
(2)
Answer
160,000
160,000
160,000
MV 12.31.20
2M x 110%
1,930,550
2,200,000
increased by 269,450
Interest
income
190,050
193,055
196,395
DISCOUNT
Amortization
30,050
33,055
36,395
Carrying
Amount
1,900,500
1,930,550
1,963,605
2,000,000
CA 12.31.20
CA 12.31.21
MV 12.31.21
2,200,000
2M x 120%
33,055
2,233,055
2,400,000
increased by 166,945
*
this is the UG-OCI to be recorded on 1/1/2021
*
this is the UG-OCI for 2021
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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What is the cumulative UG-OCI on 12/31/21?
269,450
166,945
436,395
FINAL ANSWER TO #2
(3)
1.1.20
Investment in bonds
1,900,500
Cash
12.31.20
1,900,500
Cash
160,000
Investment in bonds
30,050
Interest income
190,050
Investment in bonds
1,900,500
30,050
1,930,550
CA on 12/31/20
Since the change in business model in on 12/31/20,
the reclassification date is January 1, 2021
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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1.1.21
Financial asset - FVOCI
1,930,550
Investment in bonds
1,930,550
Financial asset - FVOCI
269,450
Unrealized gain - OCI
269,450
FA - FVOCI
1,930,550
269,450
2,200,000
*
Note that this CA on 1/1/21 is the
MV of investment on 12/31/20
12.31.21
Cash
160,000
Financial asset - FVOCI
33,055
Interest income
193,055
refer to amortization table
Financial asset - FVOCI
166,945
Unrealized gain - OCI
166,945
Financial asset - FVOCI
2,200,000
33,055
166,945
2,400,000
*
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
Note that this CA on 12/31/21 is the
MV of investment on 12/31/21.
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PROBLEM 3 AC to FVPL (2)
On January 1, 2020, ST Company purchased 10% bonds with face amount of
P3,000,000. The bonds mature on January 1, 2030 and were purchased for
P3,405,000 to yield 8%.
The entity used the effective interest method of amortization and interest is
payable annually every December 31.
The business model for this investment is to collect contractual cash flows
composed of interest and principal.
On December 31, 2021, the entity changed the business model for this
investment to realize fair value changes.
On January 1, 2022, the fair value of the bonds was P2,845,000 at an effective
rate of 11%.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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Required:
1. Prepare a table of amortization using the effective interest method for
2020 and 2021.
2. Compute the loss on reclassification.
3. Prepare journal entries for 2020, 2021 and 2022.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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AC TO FVPL (2)
1The FV is determined at reclassification date
2The difference between the previous carrying amount and FV is
recognized in profit or loss
(1)
Date
Interest
Interest
PREMIUM
received
income
Amortization
1.1.20
12.31.20
300,000
272,400
27,600
12.31.21
300,000
270,192
29,808
12.31.22
300,000
267,807
32,193
(2)
FV on 1/1/2022
CA on 12/31/2021
Loss on reclassification of financial asset
Carrying
Amount
3,405,000
3,377,400
3,347,592
3,315,399
2,845,000
3,347,592
(502,592)
Since the change in business model is on 12/31/21,
the reclassification date is January 1, 2022
(3)
2020
1.1.20
Investment in bonds
Cash
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
3,405,000
3,405,000
16
12.31.20
Cash
300,000
Investment in bonds
27,600
Interest income
272,400
2021
12.31.21
Cash
300,000
Investment in bonds
29,808
Interest income
270,192
2022
1.1.22
Loss on reclassification of financial asset
502,592
Investment in bonds
502,592
Investment in bonds
3,405,000
27,600
29,808
502,592
2,845,000
Note that the CA on 1.1.22 is the FV
of investment on that date.
Financial asset - FVPL
2,845,000
Investment in bonds
2,845,000
Since the investment is now measured at FVPL, the 11% ER is
not relevant; amortization of premium ceases.
Cash
300,000
Interest income
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
300,000
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PROBLEM 4 FVPL to AC (1)
On January 1, 2020, RS Company purchased 9% bonds with face amount of
P6,000,000.The bonds mature on January 1, 2025 and were purchased for
P5,550,000 to yield 11%.
The entity classified the bonds as held for trading and interest is payable
annually every December 31.
The entity provided the following information about fair value of the bonds and
effective rate:
Fair value
Effective rate
December 31, 2020 5,450,000
12%
December 31, 2021 6,150,000
8%
On December 31, 2021, the entity changed the business model for this
investment to collect contractual cash flows composed of principal and interest.
On January 1, 2022, the fair value of the bonds did not change.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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Required:
1. What is the interest income for 2020?
2. What amount of unrealized loss should be recognized in profit or loss
for 2020?
3. What amount of unrealized gain should be recognized in profit or loss
for 2021?
4. What is the interest income for 2022?
5. Prepare journal entries for 2020, 2021 and 2022.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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FVPL TO AC (1)
1 The FV at the reclassification date becomes the new CA of the
FA at amortized cost.
2 The difference between the
New CA of the FA at amortized cost and
The face amount of the FA
shall be amortized through P&L over the remaining life of the
FA using the effective interest method.
3 A new effective rate ER is determined based on the new CA or FV
at reclassification date.
(1)
Interest income for 2020 : 6M x 9% =
(2)
CA 12.31.20
FV 12.31.20
5,550,000
5,450,000
decreased by 100T
(3)
540,000
this is the UL - FVPL on 12.31.20
newCA 12.31.20
FV 12.31.21
5,450,000
6,150,000
this is the new CA of the FA at AC
increased by 700T
this is the UG - FVPL on 12.31.21
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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(4)
Interest income for 2022 : 6.15M x 8% =
492,000
Note that the new ER is used in 2022;
Interest received is Face value x NR; Interest income is CA x new ER
(5)
2020
1.1.20
Financial asset - FVPL
5,550,000
Cash
12.31.20
5,550,000
Cash
540,000
Interest income
Unrealized loss - FVPL
540,000
6M x 9%
100,000
Financial asset - FVPL
100,000
2021
12.31.21
Cash
540,000
Interest income
Financial asset - FVPL
540,000
700,000
Unrealized gain - FVPL
700,000
2022
1.1.22
Investment in bonds
6,150,000
Financial asset - FVPL
12.31.22
Cash
6,150,000
540,000
Investment in bonds
Interest income
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
6M x 9 %
48,000
540T – 492T
492,000
6.15M x 8%
21
PROBLEM 5 FVOCI to FVPL (6)
On January 1, 2020, ZA Company purchased 8% bonds with face amount of
P4,000,000.
The bonds mature on January 1, 2025 and were purchased for P4,335,000 to
yield 6%. Interest is payable annually every December 31.
The business model for this investment is to collect contractual cash flows
composed of principal and interest and to sell the asset in the open market.
Fair value
Effective rate
December 31, 2020
3,870,000
9%
December 31, 2021
3,615,000
12%
On December 31, 2020, the entity changed the business model for this
investment to realize fair value changes.
On January 1,
2021,
theD.fair
value
ACFAR
2233 LEOPOLDO
MEDINA,
CPA, MSAof the bonds did not change.
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Required:
1. What is the interest income for 2020?
2. What amount of unrealized loss is recognized in OCI for 2020?
3. What is the interest income for 2021?
4. What total amount is included in profit or loss in 2021 as a result of
the reclassification.?
5. Prepare journal entries for 2020 and 2021.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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FVOCI TO FVPL (6)
1 The financial asset continues to be measured at fair value
2 The FV at reclassification date becomes the new CA.
3 The cumulative gain or loss previously recognized in OCI is reclassified
to profit or loss at reclassification date.
(1)
Interest income for 2020
4,335,000 x 6%
Date
Interest
income
260,100
(2)
Interest
received
1.1.2020
12.31.2020
320,000
CA 12.31.20
MV 12.31.20
4,275,100
3,870,000
decreased by 405,100
(3)
260,100
Premium
Amortization
59,900
Carrying
Amount
4,335,000
4,275,100
this is the unrealized loss recognized in
OCI for 2020
Since the change in business model is on 12/31/20,
the reclassification date is January 1, 2021
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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Interest income for 2021 is now based on NR since
the investment is reclassified to FVPL on 1.1.2021
4,000,000 x 8%
(4)
new CA
MV
12.31.20
12.31.21
3,870,000
3,615,000
decreased by 255,000
320,000
this is the unrealized loss recognized in
P&L for 2021
Unrealized loss - OCI reclassificed to
Unrealized loss - FVPL on 1.1.21
+ Unrealized loss - FVPL on 12.31.21
Total amount included in P&L in 2021
as a result of the reclassification
405,100
255,000
660,100
Answer
(5)
2020
1.1.20
12.31.20
Financial asset - FVOCI
Cash
4,335,000
Cash
Financial asset - FVOCI
Interest income
320,000
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
4,335,000
59,900
260,100
25
Unrealized loss - FVOCI
405,100
Financial asset - FVOCI
405,100
2021
1.1.21
Financial asset - FVPL
3,870,000
Financial asset - FVOCI
Unrealized loss - FVPL
3,870,000
405,100
Unrealized loss - FVOCI
12.31.21
Cash
405,100
320,000
Interest income
Unrealized loss - FVPL
Financial asset - FVPL
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
320,000
255,000
255,000
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PROBLEM 6 FVPL to FVOCI (5)
On January 1, 2020, GH Company purchased 6% bonds with face amount of
P4,000,000. The bonds mature on January 1, 2025 and were purchased for
P3,530,000 to yield 9%.
The entity classified the bonds as held for trading and interest is payable
annually every December 31.
Fair value
Effective rate
December 31, 2020
3,490,000
10%
December 31, 2021
3,425,000
12%
On December 31, 2020, the entity changed the business model to collect
contractual cash flows and also to sell the bonds in the open market.
On January 1, 2021, the fair value of the bonds did not change.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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Required
1. What is the interest income for 2020?
2. What amount of unrealized loss is included in profit or loss for 2020?
3. What is the interest income for 2021?
4. What amount of unrealized loss is recognized in OCI for 2021?
5. Prepare journal entries for 2020 and 2021.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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FVPL TO FVOCI (5)
1 The financial asset continues to be measured at fair value
2 The FV at reclassification date becomes the new CA.
3 A new ER must be determined based on the new CA or FV at
reclassification date.
(1)
Interest income for 2020
4,000,000 x 6%
(2)
CA
FV
12.31.20
12.31.20
3,530,000
3,490,000
decreased by 40,000
Unrealized loss FVPL for 2020
(3)
240,000
Since the change in business model is on 12/31/20,
the reclassification date is January 1, 2021
Interest income for 2021
3,490,000 x 10%
349,000
New ER must be computed on reclassification date based on FV
on such date; interest income is CA x new ER.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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(4)
Date
Interest
received
1.1.21
12.31.21
Interest
income
240,000
CA 12.31.21
MV 12.31.21
3,599,000
3,425,000
decreased by 174,000
349,000
Discount
amortization
109,000
Carrying
amount
3,490,000
3,599,000
this is the Unrealized loss in OCI for 2021
(5)
2020
1.1.20
Financial asset - FVPL
Cash
12.31.20
3,530,000
3,530,000
Cash
Interest income
240,000
Unrealized loss - FVPL
Financial asset - FVPL
40,000
Financial asset - FVOCI
Financial asset - FVPL
3,490,000
Cash
Financial asset - FVOCI
Interest income
240,000
109,000
Unrealized loss - FVOCI
Financial asset - FVOCI
174,000
240,000
40,000
2021
1.1.21
3,490,000
349,000
174,000
Note : ER of 12% on 12.31.21 is not used.
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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“The best place to find a
helping hand is at the end
of your own arm.”
-Swedish proverb
ACFAR 2233 LEOPOLDO D. MEDINA, CPA, MSA
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