FATHER SATURNINO URIOS UNIVERSITY

ACCOUNTANCY PROGRAM

INTERMEDIATE ACCOUNTING II

Name: Date: Score:

Instructor: Sean Justin F. Espina, CPA

Prelim Quiz #2: Reclassification of Financial Assets; Investment Property

I. True or False. Write true if the statement is true and false if the statement is false.

1. PFRS 9 provides that an entity shall reclassify financial assets only when it changes the use for
managing the financial assets. False, change in business model
2. Where reclassification occurs, PFRS 9 provides that an entity shall apply the reclassification
retrospectively from the reclassification date. False, prospectively
3. Reclassification date is the first day of the reporting period following the change in business model
that results in an entity reclassifying financial asset. True
4. All equity investments can be reclassified. False, all equity investments cannot be reclassified.
5. Only debt investment can be reclassified because the change in business model applies
appropriately to debt investment. True, only debt investment can be reclassified, except for fair value
option (irrevocable election).
6. PAS 40, defines Investment property as property (land or a building or part of a building or both)
held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation
or both. True
7. Equipment or any movable property can qualify as investment property. False, Only Land &
Building can qualify as investment property.
8. An investment property is not held for use in the production or supply of goods or services or for
administrative purposes and not held for sale in the ordinary course of business. True
9. Investment property is initially measured at fair value and subsequently measured using either
cost model or fair value model. False, Investment Property is initially measured at COST. Then
subsequently measured using either cost model or fair value model.
10. PFRS 9, provides that when an entity reclassifies a financial asset from amortized cost to fair
value through profit or loss, the fair value is determined at reclassification date. The difference
between the previous carrying amount and fair value is recognized in other comprehensive income.
False, the difference is recognized in profit or loss.

II. Answer the questions below. Write your answer on the space after the question.

11. Which of the following statements is/are false? Statement II only

PFRS 9, provides the following if a financial asset is classified from FVPL to amortized cost:
I. The fair value at the reclassification date becomes the new carrying amount of the financial
asset at amortized cost.
II. The difference between the new carrying amount of the financial asset at amortized cost
and the face amount of the financial asset shall not be amortized over the remaining life of
the financial asset. False, it shall be amortized over the remaining life.
III. A new effective interest rate must be determined based on the new carrying amount or
fair value at reclassification date.

12. Which of the following statements is/are true? Statement III only
PFRS 9, provides the following if a financial asset is reclassified from amortized cost to FVOCI:
I. The financial asset is measured at amortized cost at reclassification date. False, measured
at Fair value.
 II. The difference between the amortized cost carrying amount and the fair value at
reclassification date is recognized in profit or loss. False, recognized in other comprehensive
income.
III. The original effective interest rate is not adjusted.

13. Which of the following statements is/are not false? Statement I only.
PFRS 9, provides the following if a financial asset is reclassified from FVOCI to amortized cost:
I. The fair value at reclassification date becomes the new amortized cost carrying amount.
II. The cumulative gain or loss previously recognized in profit or loss is eliminated and
adjusted against the fair value at reclassification date. As a result, the investment is reverted
back to amortized cost measurement. False, cumulative gain or loss previously recognized in
Other Comprehensive Income.
III. A new effective interest rate must be determined. False, no need to compute for
new effective rate. Effective is not adjusted.

14. Which of the following statements is/are not true? None

PFRS 9, provides the following if. A financial asset is reclassified from FVPL to FVOCI:
I. The financial asset continues to be measured at fair value.
II. The fair value at reclassification date becomes the new carrying amount.
III. A new effective rate must be determined based on the new carrying amount or fair value
at reclassification date.

15. Which of the following statements is/are false? Statement III only
PFRS 9, provides the following if a financial asset is reclassified from FVOCI to FVPL:
I. The financial asset continues to be measured at fair value.
II. The fair value at reclassification date becomes the new carrying amount.
III. The cumulative gain or loss previously recognized in other comprehensive income is
reclassified to retained earnings at reclassification date. False, reclassified to profit or loss

16. Certain properties may include a portion that is held to earn rentals or for appreciation and
another portion that is held for manufacturing or administrative purposes, which of the following
statements is/are true? Statement III only
I. If the portions could be sold or leased out separately, an entity shall account all the
property as investment property. False, the property is accounted separately as
investment property and owner-occupied property
II. If the portions could not be sold separately, the property is investment property if only a
significant portion is held for manufacturing or administrative purposes. False, if only an
insignificant portion.
III. When ancillary services are provided by the entity to the occupants of the property and
these services are relatively insignificant component of the arrangement, the property is
treated as investment property.
IV. When ancillary services are provided by the entity to the occupants of the property and
these services are a more significant component of the arrangement, the property is treated
as investment property. False, the property is treated as owner-occupied property.

17. PAS 40, provides that a property can be rented out to a parent, subsidiary or fellow subsidiary,
which of the following statements is/are False; None
I. Property rented out a parent, subsidiary or fellow subsidiary is classified as owner occupied
property in the consolidated financial statements that include both the lessor and the lessee.
II. Property rented out a parent, subsidiary or fellow subsidiary will qualify as investment
property in the separate financial statements of the lessor.

18. Which of the following statements is/are true regarding the measurement of transfers:
Statements II,III & IV only
I. When the entity uses cost model, transfers between investment property, owner-occupied
property and inventory shall be made at fair value. False, Carrying Amount
II. A transfer from investment property carried at fair value to owner-occupied property or
inventory shall be accounted for at fair value which becomes the deemed cost for subsequent
accounting.
 III. If owner-occupied property is transferred to investment property that is to be carried at
fair value, the difference between the fair value and the carrying amount of the property shall
be accounted for as revaluation of property, plant and equipment.
IV. If an inventory is transferred to investment property that is to be carried at fair value, the
remeasurement to fair value shall be included in profit or loss.
V. When an investment property under construction is completed and to be carried at fair
value, the difference between fair value and carrying amount shall not be included in profit
or loss. Shall be included.

19. Cash surrender value arises if the following requisites are present, which of the following
statements/requisites is/are false? Statement II only
I. The policy is a life policy.
II. Premiums for five full years must have been paid. Three
III. The policy is surrendered at the end of the third year or anytime thereafter.

20. Which of the following statement is/are true? None

I. Cash surrender value is classified as current investment. Non-current Investment
II. Dividends received on the life policy are income but a reduction of life insurance expense.
are not income

III. Problem Solving. Provide your solutions. No Solutions, No Points.

Problem 1. Fact Pattern: On January 1, 2018, ABC Co. acquired 10%, 1,000,000 bonds for 951,963.
The principal is due on December 31, 2020 but interest is due annually. The effective interest rate is
12%. In 2019, ABC Co. changed its business model. It was ascertained that the investment should
be reclassified to another measurement category. ABC Co. prepares annual financial statements only.
Information on fair values follows:
December 31, 2018 P 98
December 31, 2019 P 103
January 1, 2020 (reclassification date) P 104

Requirement: Prepare the entry to record the reclassification on January 1, 2020 under the following
independent cases:

Date Interest received Interest income Amortization Present value

1/1/2018 951,963
12/31/2018 100,000 114,236 14,236 966,199
12/31/2019 100,000 115,944 15,944 982,143
12/31/2020 100,000 117,857 17,857 1,000,000

Case #1: (Amortized cost to FVPL). The bonds were initially measured at amortized cost and are to
be reclassified to the FVPL category. Fair value at reclassification date
FA – FVPL (Trading Security) 1,040,000 (1,000,000 x 1.04)
Investment in Bonds 982,143
Gain on reclassification 57,857

Case #2: (FVPL to Amortized cost). The bonds were initially classified as held for trading (FVPL) and
are to be reclassified to the amortized cost category. Fair value = Amortized cost
FA – FVPL (Trading Security) 10,000 (1,000,000 (1.04-1.03))
Unrealized gain 10,000
* Adjust first the fair value before you reclassify the investment

Investment in Bonds 1,040,000 (1,000,000 x 1.04)

FA – FVPL 1,040,000

Case #3: (Amortized cost to FVOCI). The bonds were initially measured at amortized cost and are to
be reclassified to the FVOCI category. Carrying Amount/Amortized cost = Fair Value
 FA -FVOCI 1,040,000
Investment in Bonds 982,143
Unrealized gain – OCI 57,857

Case #4: (FVOCI to Amortized Cost). The bonds were initially classified as FVOCI and are to be
reclassified to the amortized cost category. Fair value = Amortized Cost/Carrying amount
FA – FVOCI 10,000 (1,000,000 (1.04-1.03))
Unrealized gain – OCI 10,000
* Adjust first the fair value before you reclassify the investment

Investment in Bonds 1,040,000

FA – FVOCI 1,040,000

PFRS 9, provides that the cumulative gain or loss previously recognized in other comprehensive
income is eliminated and adjusted against the fair value at reclassification date. As a result, the
investment is reverted back to amortized cost measurement. * Compute first for the cumulative
unrealized gain(loss) up to the reclassification date.
Fair value at reclassification date (1,000,000 x 1.04) 1,040,000
Initial Measurement (FVOCI) (951,963)
Cumulative Unrealized Gain – OCI 88,037

Unrealized gain – OCI 88,037

Investment in Bonds 88,037

Case #5: (FVPL to FVOCI). The bonds were initially classified as held for trading (FVPL) and are to be
reclassified to the FVOCI category. Fair value at reclassification date = Fair value at reclassification
date
FA – FVPL 10,000 (1,000,000 (1.04-1.03))
Unrealized gain 10,000
* Adjust first the fair value before you reclassify the investment

FA – FVOCI 1,040,000
FA – FVPL 1,040,000

Case #6: (FVOCI to FVPL). The bonds were initially classified as FVOCI and are to be reclassified to
the FVPL category as held for trading. Fair value at reclassification date = Fair value at
reclassification date
FA – FVOCI 10,000 (1,000,000 (1.04-1.03))
Unrealized gain – OCI 10,000
* Adjust first the fair value before you reclassify the investment

FA – FVPL 1,040,000
FA – FVOCI 1,040,000

PFRS 9, provides the following if a financial asset is reclassified from FVOCI to FVPL:
I. The financial asset continues to be measured at fair value.
II. The fair value at reclassification date becomes the new carrying amount.
III. The cumulative gain or loss previously recognized in other comprehensive
income is reclassified to profit or loss at reclassification date.

Fair value at reclassification date (1,000,000 x 1.04) 1,040,000

Initial Measurement (FVOCI) (951,963)
Cumulative Unrealized Gain – OCI 88,037

Unrealized gain – OCI 88,037

Unrealized gain – P/L 88,037
Problem 2. ABC Co. has the following assets:
 Land held for long-term capital appreciation 1,000,000 - IP
 Vacant building to be leased out under operating lease 1,000,000 – IP
 Equipment leased out under an operating lease 100,000 - OOP
 Office building awaiting disposal 50,000 - OOP
 Land held for a currently undetermined future use 700,000 – IP
 Land held for future plant site 600,000 - OOP
 Land held for sale in the ordinary course of business 500,000 - Inventory
 Building being constructed for XYZ, Inc. 200,000
 Building under construction to be rented out under operating lease 100,000 – IP
 Building leased out under finance lease (not part of your asset) 1,900,000 –
 Building leased out under operating lease 800,000 – IP
 Right-of-use asset relating to a building held by the entity and leased
out under an operating lease 1,200,000 – IP
 Building under construction to be used as office 400,000 - OOP
 Building rented out to ABC’s employees who pay rent at market rates 800,000 - OOP

Requirement: Determine the total investment property. 4,800,000

Problem 3. ABC Co. had the following transactions during the year:
 On January 1, 2019 purchased building to be held as investment property for 1,000,000. Direct
costs incurred amounted to 20,000. Costs of day-to-day servicing for the asset totaled 5,000. The
purchased building has an estimated useful life of 10 years.

INITIAL MEASUREMENT - COST

Acquisition of Investment Property (Building):
Cost 1,000,000
Directly attributable cost/direct cost 20,000
Total Cost of Investment Property 1,020,000

January 1, 2019
Investment Property (Building) 1,020,000
Cash 1,020,000
SUBSEQUENT MEASUREMENT
COST MODEL
December 31, 2019
Total Cost of Investment 1,020,000
Divide by: Useful life 10 years
Depreciation Expense 102,000

Depreciation Expense 102,000

Accumulated Depreciation 102,000

Repairs and Maintenance Expense 5,000

Cash 5,000
To record the day-to-day servicing

FAIR VALUE MODEL

December 31, 2019
Fair value on December 31, 2019 920,000
Initial Measurement (1,020,000)
Loss on change in fair value (100,000)

Loss in change in fair value 100,000

Investment Property 100,000

Repairs and Maintenance Expense 5,000

 Cash 5,000
To record the day-to-day servicing

 Constructed building to be used as investment property. The building has an estimated useful life
of 10 years upon completion of the construction. The construction was completed on July 1, 2019.
Total costs incurred include the following:
i. Materials, labor and overhead - Capitalized 2,000,000
ii. Start-up costs - Expense outright 100,000
iii. Operating losses – Expense outright 50,000
iv. Abnormal amounts of wasted materials
during construction – Expense outright 20,000

INITIAL MEASUREMENT - COST

Constructed Investment Property (Building):
Materials, labor & overhead 2,000,000
Total Cost of Investment Property 2,000,000

January 1, 2019
Investment Property (Building) 2,000,000
Start-up costs 100,000
Operating losses 50,000
Abnormal waste 20,000
Cash 2,170,000

SUBSEQUENT MEASUREMENT
COST MODEL
December 31, 2019
Total Cost of Investment Property 2,000,000
Divide by: Useful life 10 years
Depreciation Expense 200,000

Depreciation Expense 200,000

Accumulated Depreciation 200,000

FAIR VALUE MODEL

December 31, 2019
Fair value on December 31, 2019 2,300,000
Initial Measurement (2,000,000)
Gain on change in fair value 300,000

Investment Property 300,000

Gain on change in fair value 300,000

On December 31, 2019 the fair value of the purchased building is 920,000 and the fair value of the
constructed building is 2,300,000. Use straight line method for depreciation.

Requirements:
a. How much is the total cost of investment property on initial recognition? 3,020,000
Acquired Building 1,020,000
Constructed Building 2,000,000
Total Investment Property 3,020,000
b. Under cost model, how much is the carrying amount of investment property on December
31, 2019? 2,718,000
Acquired Building Constructed Building
 Initial Cost 1,020,000 2,000,000
Accumulated dep (102,000) (200,000)
Carrying Amount 918,000 1,800,000 = 2,718,000
c. Under fair value model, how much is the carrying amount of investment property on
December 31, 2019? 3,220,000
Acquired Building Constructed Building
2019 Fair value 920,000 2,300,000 = 3,220,000

c. Under cost model, how much is the total expenses to be recognized in 2019 income
statement? 477,000
Acquired Building Constructed Building
Depreciation Expense 102,000 200,000
Repairs & Maintenance 5,000 0
Start-up costs 0 100,000
Operating losses 0 50,000
Abnormal waste 0 20,000
Total 107,000 370,000 = 477,000

e. Under fair value model, how much is the net amount of gain (loss) to be recognized in 2019
income statement? 25,000
Acquired Building Constructed Building
Gain (loss) on change in FV (100,000) 300,000
Repairs & Maintenance (5,000) 0
Start-up costs 0 (100,000)
Operating losses 0 (50,000)
Abnormal waste 0 (20,000)
Total (105,000) 130,000 = 25,000