PROBLEMS

RECLASSIFICATION OF FINANCIAL ASSET

ACFAR 2233 INTERMEDIATE ACCOUNTING 2

LEOPOLDO D. MEDINA, CPA, MSA
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%.
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.
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       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

(2) 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
(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 4,688,600

12.31.20 Cash 300,000

Financial asset - FVOCI 73,488
Interest income 373,488

Financial asset - FVOCI 507,912

Unrealized gain - OCI 507,912
 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.
12.31.22 Cash 300,000
Investment in
bonds 85,716
Interest
income 385,716
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.
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.
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 Interest DISCOUNT Carrying
received income Amortization Amount
1.1.20       1,900,500
12.31.20 160,000 190,050 30,050 1,930,550
12.31.21 160,000 193,055 33,055 1,963,605
12.31.22 160,000 196,395 36,395 2,000,000

(2) CA 12.31.20 MV 12.31.20

2M x 110%
1,930,550 2,200,000 *
increased by 269,450 this is the UG-OCI for 2020

CA 12.31.21 MV 12.31.21
2,200,000 2M x 120%
33,055
2,233,055 2,400,000 *
Answer increased by 166,945 this is the UG-OCI for 2021
 What is the cumulative UG-OCI on 12/31/21?
269,450
166,945
436,395

(3)
1.1.20 Investment in bonds 1,900,500
Cash 1,900,500

12.31.20 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  
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 * Note that this CA on 12/31/21 is the
MV of investment on 12/31/21.
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%.
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.
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 Carrying
received income Amortization Amount
1.1.20       3,405,000
12.31.20 300,000 272,400 27,600 3,377,400
12.31.21 300,000 270,192 29,808 3,347,592
12.31.22 300,000 267,807 32,193 3,315,399

(2) FV on 1/1/2022 2,845,000

CA on 12/31/2021 3,347,592
Loss on reclassification of financial asset (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 3,405,000
Cash 3,405,000
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 300,000
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.
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.
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% = 540,000

(2) CA 12.31.20 FV 12.31.20

5,550,000 5,450,000
decreased by 100T this is the UL - FVPL on 12.31.20

(3) 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 UL - FVPL on 12.31.20
(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 5,550,000

12.31.20 Cash 540,000

Interest income 540,000 5M x 9%

Unrealized loss - FVPL 100,000

Financial asset - FVPL 100,000
2021
12.31.20 Cash 540,000
Interest income 540,000

Financial asset - FVPL 700,000

Unrealized gain - FVPL 700,000
2022
1.1.20 Investment in bonds 6,150,000
Financial asset - FVPL 6,150,000

Cash 540,000
Investment in bonds 48,000
Interest income 492,000 6.15M x 8%
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
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 2019 and 2021.
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% 260,100

(2)
Date Interest Interest Premium Carrying
received income Amortization Amount
1.1.2020 4,335,000
12.31.2020 320,000 260,100 59,900 4,275,100

CA 12.31.20 MV 12.31.20

4,275,100 3,870,000
decreased by 405,100 this is the unrealized loss recognized in
OCI for 2020

(3) Since the change in business model is on 12/31/20,  

the reclassification date is January 1, 2021    
 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% 320,000

(4) new CA MV
12.31.20 12.31.21
3,870,000 3,615,000
decreased by 255,000 this is the unrealized loss recognized in
P&L for 2021

Unrealized loss - OCI reclassificed to

Unrealized loss - FVPL on 1.1.21 405,100
+ Unrealized loss - FVPL on 12.31.21 255,000
Total amount included in P&L in 2021 660,100 Answer
as a result of the reclassification
(5)
2020
1.1.20 Financial asset - FVOCI 4,335,000
Cash 4,335,000

12.31.20 Cash 320,000

Financial asset - FVOCI 59,900
Interest income 260,100
 Unrealized loss - FVOCI 405,100
Financial asset - FVOCI 405,100
2021
1.1.21 Financial asset - FVPL 3,870,000
Financial asset - FVOCI 3,870,000

Unrealized loss - FVPL 405,100

Unrealized loss - FVOCI 405,100

12.31.21 Cash 320,000

Interest income 320,000

Unrealized loss - FVPL 255,000

Financial asset - FVPL 255,000
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.
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 2019 and 2021.
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% 240,000

(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) 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.  
(4) Date Interest Interest Discount Carrying
received income amortization amount
1.1.21 3,490,000
12.31.21 240,000 349,000 109,000 3,599,000

CA 12.31.21 MV 12.31.21
3,599,000 3,425,000
decreased by 174,000 this is the Unrealized loss in OCI for 2021
(5)
2020
1.1.20 Financial asset - FVPL 3,530,000
Cash 3,530,000

12.31.20 Cash 240,000

Interest income 240,000

Unrealized loss - FVPL 40,000

Financial asset - FVPL 40,000
2021
1.1.21 Financial asset - FVOCI 3,490,000
Financial asset - FVPL 3,490,000

Cash 240,000
Financial asset - FVOCI 109,000
Interest income 349,000

Unrealized loss - FVOCI 174,000

Financial asset - FVOCI 174,000

Note : ER of 12% on 12.31.21 is not used.

“The best place to find
a helping hand is at
the end of your own
arm.”
-Swedish proverb