ACCA104 Reclassification of Financial Asset Sample Problem Solving PDF

Preview

Summary

SAMPLE PROBLEM SOLVING ON RECLASSIFICATION OF FINANCIAL ASSETPROBLEM 1On January 1, 2020 ABC 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 of each yea...

Description

SAMPLE PROBLEM SOLVING ON RECLASSIFICATION OF FINANCIAL ASSET PROBLEM 1 On January 1, 2020 ABC 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 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 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. ANSWER: 1) Date 1/1/2020 12/31/2020 12/31/2021 12/31/2022 12/31/2023

Interest received

Interest income

Discount amortization

300,000 300,000 300,000 300,000

373,488 379,367 385,716 393,829

73.488 79,367 85,716 92.829

2) Fair value – 12/31/2020 (5,000,000 x 105) Carrying amount – 12/31/2020 Unrealized gain OCI for 2020

5,250,000 4,742,088 507,912

Carrying amount 4,688,600 4,742,088 4,821,455 4,907,171 5,000,000

3)

Fair value – 12/31/2021 (5,000,000 x 115) Carrying amount – 12/31/2021 per table Cumulative unrealized gain – 12/31/2020 Unrealized gain for 2020 Unrealized gain for 2021

5,500,000 4,821,455 678,545 507,912 170,633

4) 2020 Jan. 1

Dec. 31

31

31

2021 Dec. 31

31

31

2022 Jan. 1

1

Dec. 31

31

Financial asset - FVOCI Cash Cash Interest income Financial asset – FVOCI Interest income

4,688,600 4,688,600 300,000 300,000 73,488 73,488

Financial asset - FVOCI Unrealized gain – OCI

507,912

Cash Interest income

300,000

507,912

300,000

Financial asset - FVOCI Interest income

79,367

Financial asset - FVOCI Unrealized gain - OCI

170,633

Investment in bonds Financial asset – FVOCI

79,367

170,633

5,500,000 5,500,000

Unrealized gain - OCI Investment in bonds

678,545

Cash Interest income

300,000

Financial asset - FVOCI Interest income

678,545

300,000 85,716 85,716

PROBLEM 2 On January 1, 2020, DEF Company purchased bonds with face amount of P2,000,000 for P1,900,000 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 12% on December 31, 2021. Required: 1. Prepare a table of amortization using the effective interest method. 2. Compute the unrealized gain for 2021. 3. Prepare journal entries for 2020 and 2021. ANSWER: 1) Date 1/1/2020 12/31/2020 12/31/2021 12/31/2022

Interest received (8%) 160,000 160,000 160,000

Interest income (10%) 190,050 193,055 196,395

Discount amortization 30,050 33,055 36,395

2) Fair value – January 1, 2021 (2,000,000 x 110) Carrying amount on January 1, 2021 Unrealized gain OCI

2,200,000 (1,930,550) 269,450

Fair value – December 31, 2021 Carrying amount 0n December 31, 2021 Cumulative unrealized gain in OCI for 2021

2,400,000 (1,963,603) 463,395

Carrying amount 1,900,000 1,930,550 1,963,605 2,000,000

3) 2020 Jan. 1

Dec. 31

31

2021 Jan. 1

1

Dec. 31

31

31

Investment in bonds Cash Cash Interest income Investment in bonds Interest income

1,900,000 1,900,000 160,000 160,000 30,050 30,050

Financial asset - FVOCI Investment in bonds

1,930,550

Financial asset - FVOCI Unrealized gain - OCI

269,450

Cash Interest income

160,000

Financial asset - FVOCI Interest income Financial asset - FVOCI Unrealized gain – OCI (436,395 – 269,450)

1,930,550

269,450

160,000 33,055 33,055 166,945 166,945...