TFA 1

Chapter 41 – Reclassification of Financial Asset

Mark Adrian C. Patupat

PROBLEM 41 - 3 (IFRS - From the amortized cost to FVOCI)

On January 1, 2019, Myopic 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, 2021 and pay 8% interest annually every December 31 with
a 10% effective yield.
On December 31, 2019, 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, 2020 and 120 on December 31, 2020.

1. What amount should be reported as interest income for 2019?

a. 152,040 
b. 190,050
c. 160,000
d. 200,000 

2. Which amount of unrealized gain in OCI should be recognized on January 1, 2020?

a. 200,000
b. 269,450 
c. 290,500
d. 0 

3. What cumulative amount in OCI is recognized in the statement of changes in equity for
2020?
a. 166,945
b. 269,450
c. 499,500 
d. 436,395

4. What amount should be reported as interest income for 2020?

a. 225,306
b. 180,244
c. 193,055
d. 220,000
 5. What is the carrying amount of the investment on December 31, 2020?
a. 2,400,000
b. 1,930,500
c. 1,963,605
d. 2,260,000

SOLUTION 41 -3
Question 1 Answer b
(8%) (10%)
Interest Interest Discount Carrying
Date received income Amortization amount
1/1/2019 1,900,500
12/31/2019 160,000 190,050 30,050 1,930,550
12/31/2020 160,000 193,055 33,055 1,963,605

Question 2 Answer b
Fair Value – January 1, 2020 (2,000,000×110) 2,200,000
Carrying amount per table – January 1, 2020 (1,930,550)
Unrealized gain – OCI 269,450
On December 31, 2019, the entity changed the business model to collect contractual cash flows
and to sell the financial asset in the open market.
Accordingly, the bond investment is reclassified from amortized cost to FVOCI.
The reclassification is recognized on January 1, 2020 and the difference between the amortized
cost carrying amount and the fair value at reclassification date is recognized in OCI.
Question 3 Answer d
Fair Value – December 1, 2019 (2,000,000×120) 2,400,000
Carrying amount per table – December 31, 2019 (1,963,605)
Cumulative unrealized gain in OCI – 12/31/2020 436,395

Question 4 Answer c
Interest income for 2020 (see table) 193,055
Question 5 Answer a
Fair Value – December 31, 2020 (2,000,000×120) 2,400,000
The carrying amount is always the fair value at year-end because the bond investment is
measured at FVOCI.
PROBLEM 41 - 4 (IFRS - From the amortized cost to FVOCI)
On January 1, 2019, Soledad Company purchased 10% bonds in the face amount of P3,000,000.
The bonds mature on January 1, 2029 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, 2020, the entity changed the business model for this investment to realize fair
value changes.
On January 1, 2021, the fair value of the bonds was P2,845,000 at an effective rate of 11%.
1. What amount should be reported as interest income for 2020?
a. 337,740
b. 300,000
c. 272,400
d. 270,192

2. What amount in profit or loss should be recognized in 2021 as a result of reclassification?

a. 531,600
b. 502,292
c. 154,200
d. 0

3. What amount should be reported as interest income for 2021?

a. 300,000
b. 312,950
c. 267,807
d. 284,500

SOLUTION 41 -4
Question 1 Answer d
(10%) (8%)
Interest Interest Premium Carrying
Date received income Amortization amount
Jan. 1, 2019 3,405,000
Dec. 31, 2019 300,000 272,400 27,600 3,377,400
Dec. 31, 2020 300,000 270,192 29,808 3,347,592

Question 2 Answer b

Fair Value – January 1, 2021 2,845,000

Carrying amount – January 1, 2021 per table (3,347,592)
Loss on reclassification (502,592)
On January 1, 2021, the reclassification date, the entity will reclassify the bond investment from
amortization cost to fair value through profit or loss.
The difference between the fair value and previous carrying amount on such date is recognized
in profit or loss.
Question 3 Answer a
Interest income for 2021 (3,000,000×10%) 300,000
If the investment is measured at fair value through profit or loss, there is no discount or premium
amortization.
Accordingly, the interest income is based on the nominal rate.

PROBLEM 41 - 5 (IFRS - From the amortized cost to FVOCI)

On January 1, 2019, Royalty Company purchased 9% bonds in the face amount of P6,000,000.
The bonds mature on January 1, 2024 and were purchased for P5,555,000 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 the fair value of the bonds
and effective rate:
Fair value Effective rate
December 31, 2019 5,450,000 12%
December 31, 2019 6,155,000 8%

On December 11, 2020, the entity changed the business model for this investment to collect
contractual cash flows composed of principal and interest.
On January1, 2021, the fair value of the bonds did not change.
1. What is the interest income for 2019?
a. 540,000
b. 610,922
c. 660,000
d. 661,918
2. What amount in profit or loss should be recognized in 2021 as a result of reclassification?
a. 500,000
b. 450,000
c. 105,000
d. 0
3. What amount of unrealized gain should be recognized in profit or loss for 2020?
a. 155,000
b. 600,000
c. 705,000
d. 0
 4. What is the interest income for 2021?
a. 492,000
b. 540,000
c. 480,000
d. 677,050

SOLUTION 41 -5
Question 1 Answer a
Interest income for 2019 (6,000,000×9%) 540,000
Question 2 Answer c
Fair Value – December 31, 2019 5,450,000
Carrying amount – December 31, 2019 (5,555,000)
Unrealized loss for 2020 (105,000)
Question 3 Answer c
Fair Value – December 31, 2020 6,155,000
Carrying amount – December 31, 2020 (5,450,000)
Unrealized gain for 2020 705,000
Question 4 Answer a
Interest income for 2021 (6,155,000×8%) 492,400
The bond investment is reclassified from FVPL to amortized cost on January 1, 2021, the
reclassification date.
The fair value on such date becomes the gross amortized cost for subsequent measurement.
A new effective rate is composed based on such fair value and the interest method is used in
computing interest income starting 2021.
The new effective rate is 8% based on the fair value of P6,155,000 on December 31, 2020.