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RECLASSIFICATION_OF_FINANCIAL_ASSETS.pdf

The document discusses the reclassification of financial assets under IFRS, detailing specific problems and solutions related to various scenarios such as changes in business models and the application of the effective interest method. It includes calculations for amortization tables, unrealized gains or losses, and journal entries for different companies over multiple years. Each problem illustrates the accounting treatment for financial assets transitioning between different classifications, emphasizing the impact on financial statements.

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2K views

RECLASSIFICATION_OF_FINANCIAL_ASSETS.pdf

The document discusses the reclassification of financial assets under IFRS, detailing specific problems and solutions related to various scenarios such as changes in business models and the application of the effective interest method. It includes calculations for amortization tables, unrealized gains or losses, and journal entries for different companies over multiple years. Each problem illustrates the accounting treatment for financial assets transitioning between different classifications, emphasizing the impact on financial statements.

Uploaded by

bahogyudka
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CHAPTER 21 - RECLASSIFICATION OF FINANCIAL ASSET

Problem 21-1 (IFRS - From FVOCI to amortized cost)


On January 1, 2023 Complex 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, 2026 and pay 6% interest annually on December 31 of each year with 8%
effective yield.

The bonds are quoted at 105 on December 31, 2023 and 110 on December 31, 2024.

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, 2024, the entity changed the business model to collect only contractual cash flows.

On December 31, 2025, the bonds are quoted at 115 and market rate of interest is 10%

Required:
1. Prepare a table of amortization using the effective interest method.
2. Determine the unrealized gain for 2023.
3. Determine the unrealized gain for 2024.
4. Prepare journal entries for 2023, 2024, and 2025

ANSWER:
Requirement 1

Date Interest Received Interest Income Discount Amortization Carrying Amount

01/01/23 4,668,600

12/31/23 300,000 373,488 73,488 4,742,088

12/31/24 300,000 379,367 79,367 4,821,455

12/31/25 300,000 385,716 85,716 4,907,171

12/31/26 300,000 392,829 92,829 5,000,000

Requirement 2
Fair Value, 12/31/23 (5,000,000 x 105%) 5,250,000
Carrying Amount, 12/31/23 ` 4,742,088
Unrealized Gain - 2023 507,912

Requirement 3
Fair Value, 12/31/24 (5,000,000 x 110%) 5,500,000
Carrying Amount, 12/31/24 4,821,455
Cumulative Unrealized Gain 678,545
Unrealized Gain - 2023 507,912
Increase in unrealized gain, 2024 170,633
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Requirement 4
2023
Jan 1 Financial Asset - FVOCI 4,668,600
Cash 4,668,600

Dec 31 Cash 300,000


Interest Income 300,000

Dec 31 Financial Asset - FVOCI 73,488


Interest Income 73,488

Dec 31 Financial Asset - FVOCI 507,912


Unrealized Gain - OCI 507,912

2024
Dec 31 Cash 300,000
Interest Income 300,000

Dec 31 Financial Asset - FVOCI 79,367


Interest Income 79,367

Dec 31 Financial Asset - FVOCI 170,633


Unrealized Gain - OCI 170,633

2025
Jan 1 Investment in bonds 5,500,000
Financial Asset - FVOCI 5,500,000

Jan 1 Unrealized Gain - OCI 678,545


Investment in bonds 678,545

Dec 31 Cash 300,000


Interest Income 300,000

Dec 31 Investment in bonds 85,716


Interest Income 85,716

Problem 21-2 (IFRS - From amortized cost to FVOCI)


On January 1, 2023, 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, 2025 and pay 8% interest annually every December 31 with a 10% effective yield.

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On December 31, 2023, 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, 2024 and 12% on December 31, 2024.

Required:
1. Prepare a table of amortization using the effective interest method.
2. Determine the unrealized gain for 2023.
3. Prepare journal entries for 2023 and 2024.

ANSWER:
Requirement 1

Date Interest Received Interest Income Discount Amortization Carrying Amount

01/01/23 1,900,500

12/31/23 160,000 190,050 30,050 1,930,550

12/31/24 160,000 193,055 33,055 1,963,605

12/31/25 160,000 196,395 36,395 2,000,000

Requirement 2
Fair Value, 12/31/23 (2,000,000 x 110%) 2,200,000
Carrying Amount, 12/31/23 1,930,550
Unrealized Gain - OCI 269,450

Fair Value, 12/31/24 (2,000,000 x 120%) 2,400,000


Carrying Amount, 12/31/24 1,963,605
Cumulative Unrealized Gain - OCI, 2024 436,395

Requirement 3
2023
Jan 1 Investment in bonds 1,900,500
Cash 1,900,500

Dec 31 Cash 160,000


Interest Income 160,000

Dec 31 Investment in bonds 30,050


Interest Income 30,050

2024
Jan 1 Financial Asset - FVOCI 1,930,550
Investment in bonds 1,930,550

Jan 1 Financial Asset - FVOCI 269,450


Unrealized Gain - OCI 269,450

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Dec 31 Cash 160,000
Interest Income 160,000

Dec 31 Financial Asset - FVOCI 33,055


Interest Income 33,055

Dec 31 Financial Asset - FVOCI 166,945


Unrealized Gain - OCI 166,945
(436,395 - 269,450)

Problem 21-3 (IFRS - From amortized cost to FVPL)


On January 1, 2023, Soledad Company purchased 10% ten-years bonds with face amount of P3,000,000 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, 2024, the entity changed the business model for this investment to realize fair value changes.

On January 1, 2025, 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 2023 and 2024.
2. Determine the loss on reclassification..
3. Prepare journal entries for 2023, 2024 and 2025.

ANSWER:
Requirement 1

Date Interest Received Interest Income Premium Amortization Carrying Amount

01/01/23 3,405,000

12/31/23 300,000 272,400 27,600 3,377,400

12/31/24 300,000 270,192 29,808 3,347,592

Requirement 2
Fair Value, 01/01/25 2,845,000
Carrying Amount, 12/31/24 3,347,592
Loss on reclassification 502,592

Requirement 3
2023
Jan 1 Investment in bonds 3,405,000
Cash 3,405,000

Dec 31 Cash 300,000


Interest Income 300,000
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Dec 31 Interest Income 27,600
Investment in bonds 27,600

2024
Dec 31 Cash 300,000
Interest Income 300,000

Dec 31 Interest Income 29,808


Investment in bonds 29,808

2025
Jan 1 Loss on reclassification 502,952
Investment in bonds 502,952

Jan 1 Financial asset - FVPL 2,845,000


Investment in bonds 2,845,000
Dec 31 Cash 300,000
Interest Income 300,000

Problem 21-4 (IFRS - From FVPL to amortized cost)


On January 1, 2023, Royalty Company purchased bonds with face amount of P6,000,000 and 9% stated rate.

The bonds were purchased for P5,550,000 to yield 11% and mature on January 1, 2028.

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, 2023 5,450,000 12%
December 30, 2024 6,150,000 8%

On December 31, 2024, the entity changed the business model for this investment to collect contractual cash flows
composed of principal and interest.

The fair value of the bonds of P6,150,000 on December 31, 2024 remained unchanged on January 1, 2025.

Required:
1. What amount should be reported as interest income for 2023?
2. What amount of unrealized loss should be recognized in the income statement for 2023?
3. What amount of unrealized gain should be recognized in the income statement for 2024?
4. What amount should be reported as interest income for 2025?
5. Prepare journal entries for 2023, 2024 and 2025.

ANSWER:
Requirement 1
Interest Income (6,000,000 x 9%) 540,000

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Requirement 2
Fair Value, 12/31/23 5,450,000
Carrying Amount, 12/31/23 5,550,000
Unrealized loss - FVPL, 2023 100,000

Requirement 3
Fair Value, 12/31/24 6,150,000
Carrying Amount, 12/31/24 5,450,000
Unrealized Gain - FVPL, 2024 700,000

Requirement 4
Interest Income (6,150,000 x 8%) 492,000

Requirement 5
2023
Jan 1 Financial Asset - FVPL 5,550,000
Cash 5,550,000

Dec 31 Cash 540,000


Interest Income 540,000

Dec 31 Unrealized loss - FVPL 100,000


Financial Asset - FVPL 100,000

2024
Dec 31 Cash 540,000
Interest Income 540,000

Dec 31 Financial Asset - FVPL 700,000


Unrealized Gain - FVPL 700,000

2025
Jan 1 Investment in bonds 6,150,000
Financial Asset - FVPL 6,150,000

Dec 31 Cash 540,000


Interest Income 540,000

Dec 31 Interest Income 48,000


Investment in bonds 48,000
(540,000 - 492,000)

Problem 21-5 (IFRS - From FVOCI to FVPL)


On January 1, 2023, Zeta Company purchased 8% bonds with face amount of P4,000,000.

The bonds were purchased for P4,335,000 to yield 6% and mature on January 1, 2024. Interest is payable annually
every December 31.

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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, 2019 3,870,000 9%
December 31, 2020 3,615,000 12%

On December 31, 2023, the entity changed the business model for this investment to realize fair value changes.

The fair value of the bonds of P3,870,000 on December 31, 2023 remained unchanged on January 1, 2024.

Required:
1. What amount should be reported as interest income for 2023?
2. What amount of unrealized loss should be recognized in other comprehensive income for 2023?
3. What amount should be reported as interest income for 2024?
4. What total amount is included in profit or loss in 2024 as a result of the reclassification?
5. Prepare journal entries for 2023 and 2024.

ANSWER:
Requirement 1
Interest Income (4,335,000 x 6%) 260,100

Requirement 2
Acquisition Cost 4,335,000
Less: Premium Amortization
Interest Received (4,000,000 x 8%) 320,000
Interest Income (4,335,000 x6%) 260,100 59,900
Carrying Amount, 12/31/23 4,275,100

Fair Value, 12/31/23 3,870,000


Carrying Amount, 12/31/23 4,275,000
Unrealized loss - OCI, 2023 405,100

Requirement 3
Interest Income (4,000,000 x 8%) 320,000
*The bond investment is reclassified to FVPL, thus the interest income will be based on nominal rate.

Requirement 4
Fair Value, 12/31/24 3,615,000
Carrying Amount, 12/31/24 3,870,000
Unrealized loss in 2024 included in P/L (255,000)
Reclassified from OCI to P/L (405,100)
Total amount to be included in P/L in 2024 (660,100)

Requirement 5
2023
Jan 1 Financial Asset - FVOCI 4,335,000
Cash 4,335,000

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Dec 31 Cash 320,000
Interest Income 320,000

Dec 31 Interest Income (320,000 - 260,100) 59,900


Financial Asset - FVOCI 59,900

Dec 31 Unrealized loss - OCI 405,100


Financial Asset - FVOCI 405,100

2024
Jan 1 Financial Asset - FVPL 3,870,000
Financial Asset - FVOCI 3,870,000

Jan 1 Unrealized loss - FVPL 405,100


Unrealized loss - OCI 405,100

Dec 31 Cash 320,000


Interest Income 320,000

Dec 31 Unrealized loss - FVPL 255,000


Financial Asset - FVPL 255,000

Problem 21-6 (IFRS - From FVPL to FVOCI)


On January 1, 2023, Delta Company purchased 6% bonds with face amount of P4,000,000.

The bonds were purchased for P3,530,000 to yield 9% and mature on January 1, 2028.

The entity classified the bonds as held for trading and interest is payable annually every December 31.

Fair Value Effective rate


December 31, 2023 3,490,000 10%
December 31, 2024 3,425,000 12%

On December 31, 2019, the entity changed the business model to collect contractual cash flows and also to sell the bonds
in the open market.

The fair value of the bonds of P3,490,000 on December 31, 2023 remained unchanged on January 1, 2024.

Required:
1. What amount should be reported as interest income for 2023?
2. What amount of unrealized loss should be recognized in the income statement for 2023?
3. What amount should be reported as interest income for 2024?
4. What amount of unrealized loss should be recognized in other comprehensive income for 2024?
5. Prepare journal entries for 2023 and 2024.

ANSWER:
Requirement 1
Interest Income (4,000,000 x 6%) 240,000

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Requirement 2
Fair Value, 12/31/23 3,490,000
Carrying Amount, 12/31/23 3,530,000
Unrealized Loss - FVPL, 2023 40,000

Requirement 3
Interest Income (3,490,000 x 10%) 349,000
*The bond investment is reclassified from FVPL to FVOCI on January 1, 2024, the reclassification date.
A new effective interest rate must be computed based on the fair value on such date.
Subsequently, interest income is computed using the effective interest method.

Requirement 4
Carrying Amount, 01/01/24 3,490,000
Add: Discount Amortization
Interest Received (4,000,000 x 6%) 240,000
Interest Income (3,490,000 x 10%) 349,000 109,000
Carrying Amount, 12/31/24 3,599,000

Fair Value, 12/31/24 3,425,000


Carrying Amount, 12/31/24 3,599,000
Unrealized Loss - OCI, 2024 174,000

Requirement 5
2023
Jan 1 Financial Asset - FVPL 3,530,000
Cash 3,530,000

Dec 31 Cash (4,000,000 x 6%) 240,000


Interest Income 240,000

Dec 31 Unrealized loss - FVPL 40,000


Financial Asset - FVPL 40,000

2024
Jan 1 Financial Asset - FVOCI 3,490,000
Financial Asset FVPL 3,490,000

Dec 31 Cash (3,490,000 x 10%) 349,000


Interest Income 349,000

Dec 31 Financial Asset - FVOCI 109,000


Interest Income 109,000

Dec 31 Unrealized loss - OCI 174,000


Financial Asset - FVOCI 174,000

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