PROBLEM 3: EXERCISES

1. Solutions:

Requirement (a): Reclassification date

The reclassification date is January 1, 20x3.

Requirement (b): Journal entry on reclassification date

Date Interest received Interest income Amortization Present value

Jan. 1, 20x1 1,903,927

Dec. 31, 20x1 200,000 228,471 28,471 1,932,398
Dec. 31, 20x2 200,000 231,888 31,888 1,964,286
Dec. 31, 20x3 200,000 235,714 35,714 2,000,000

Jan. 1, 20x3 Held for trading securities 2,080,000

(2M x 104%)
Investment in bonds at
amortized cost 1,964,286
Gain on reclassification 115,714

2. Solutions:

Requirement (a):
Jan. 1, 20x3 Held for trading securities 20,000
[2M x (104% - 103%)]
Unrealized gain – P/L 20,000
Jan. 1, 20x3 Investment in bonds at amortized cost (2M x 104%)
Held for trading securities 2,080,000
2,080,000

Requirement (b):
Carrying amount (fair value) at date of reclassification 2,080,000
Face amount (2,000,000)
Difference – Premium 80,000

3. Solution:

1/1/x2
FVPL asset 6,000
Unrealized gain – P/L 6,000

Amortized cost asset 226,000

FVPL asset 226,000

4. Solutions:

Scenario (a): Amortized cost to FVPL

Jan. 1, FVPL asset 240,000
20x3 Amortized cost asset 200,000
Gain on reclassification (squeeze) 40,000

Scenario (b): FVPL to Amortized cost

Jan. 1, FVPL asset 40,000
20x3 Unrealized gain – P/L 40,000
Jan. 1, Amortized cost asset 240,000
20x3 FVPL asset 240,000

Scenario (c): Amortized cost to FVOCI (mandatory)

Jan. 1, FVOCI asset 240,000
20x3 Amortized cost asset 200,000
Gain on reclassification – OCI 40,000

Scenario (d): FVOCI (mandatory) to Amortized cost

Jan. 1, FVOCI asset 40,000
20x3 Unrealized gain – OCI 40,000
Jan. 1, Amortized cost asset (squeeze) 190,000
20x3 Unrealized gain – OCI (10K + 40K) 50,000
FVOCI asset(FV on reclassification date) 240,000

Scenario (e): FVPL to FVOCI (mandatory)

 Jan. 1, FVPL asset 40,000
20x3 Unrealized gain – P/L 40,000
Jan. 1, FVOCI asset 240,000
20x3 FVPL asset 240,000

Scenario (f): FVOCI (mandatory) to FVPL

Jan. 1, FVOCI asset 40,000
20x3 Unrealized gain – OCI 40,000
Jan. 1, FVPL asset 240,000
20x3 FVOCI asset 240,000
Jan. 1, Unrealized gain – OCI 50,000
20x3 Gain on reclassification – P/L 50,000

5. Solutions:

Dec. 31, Impairment loss – P/L 9,000

20x1 Unrealized loss – OCI 21,000
Investment in bonds – FVOCI 30,000

Dec. 31, Interest receivable 30,000

20x1 Interest income 30,000