INITIAL MEASUREMENT

On January 1, 2020, ABC Company purchased 10% bonds with face amount of P5M plus transaction cost of P101,500 with
a yield rate of 8%. The bonds mature on December 31, 2024 and pay interest annually on December 31. There is no
established selling price of the bonds. What is the initial cost of the bond investment if
(1) held for trading 5,399,350
(2) if irrevocably designated as financial asset at fair value through other comprehensive income 5,500,850
(3) if financial asset at amortized cost. 5,500,850

SUBSEQUENT MEASUREMENT 1
ABC purchased P5M of bonds at par. The entity has elected the fair value option for this investment. At year end, the entity
received annual interest of P200,000, and the fair value of the bonds was P4,705,000. What is the total/net income or loss
from the bond investment should be reported in the income statement?
(1) if through profit or loss 200,000 interest income – 295,000 unrealized loss = (95,000)
(2) if through other comprehensive income? 200,000 interest income; the 295,000 UL is a component of other
comprehensive income, therefor, equity.

Note, in either situations, the financial asset bonds are measured at fair value of P4,705,000.

Assume further that at year end of the following year, the entity received annual interest of P200,000 and the fair value of
the financial assets turn P4,800,000. (Ignore amortization of any discount or premium yet.)
What is the total/net income or loss from the bond investment should be reported in the income statement?
(1) if through profit or loss 200,000 interest income +95,000 unrealized income = 295,000
(2) if through other comprehensive income? 200,000 interest income; the (4,705,000-4,800,000) 95,000 UG is a component
of other comprehensive income, therefor, equity. The 295,000 UL is closed to R/E by the end of the year since the valuation
of the financial assets result to a gain.

SUBSEQUENT MEASUREMENT 2
ABC began business in February of 2020. During the year, ABC purchased a portfolio of investment in profit or loss equity
securities. In its December 31, 2020 statement of financial position, ABC appropriately reported a P100,000 credit balance
in its “Fair Value Adjustment” account. There was no change during 2021 in the composition of ABC’s portfolio of equity
securities to profit or loss. Pertinent data are as follows:
Security Cost December 31, 2021 Market Value
P P2,400,000 P2,250,000
Q 2,500,000 2,350,000
R 1,900,000 1,800,000
What amount of unrealized loss on these securities should be included in ABC’s profit for the year ended December 31,
2021? P300,000 (6,700,000-6,400,000)=300,000

Entry 2020 (P100,000 given); CV if FA@FVTPL 6,700,000

UL – P/L 100,000
Fair value adjustment 100,000

Entry 2021 (6,700,000-6,400,000)=300,000; CV if FA@FVTPL 6,400,000

UL – P/L 100,000
Fair value adjustment 100,000

SUBSEQUENT MEASUREMENT 3
During 2020, ABC purchased marketable securities designated as fair value to other comprehensive income. At December
31, 2020, the balance in the fair value adjustment account was P350,000 credit. There were no security transactions during
2021. Pertinent data on December 31, 2021 are:
Security Historical Cost Market
C P1,500,000 P1,475,000
P 1,250,000 1,200,000
 A 2,250,000 2,087,500
By what amount the financial instrument had increased its value in 2021? 112,500
2020 5,000,000-350,000 decrease=4,650,000
2021 4,762,500-4,650,000=112,500 increase

Entry 2020 (P350,000 given); CV of FA@FVTOCI is 4,650,000

UL – OCI P350,000
Fair value adjustment P350,000

Entry 2021 (4,762,500-4,650,000)= 112,500 increase; CV of FA@FVOCI 4,762,500

Fair value adjustment 112,500
UL-OCI 112,500

SUBSEQUENT MEASUREMENT 4 (Debt Instrument FA@FVTOCI)

On January 1, 2020, ABC purchased 12% bonds with face amount of P5M. The bonds provide an effective yield of 10%.
The bonds are date January 1, 2020, mature on January 1, 2025 and pay interest annually on December 31 of each year.
The bonds are quoted at 120 on December 31, 2020, and P115 on December 31, 2021. The entity has elected the fair
value option through other comprehensive income, for the bond investment. Prepare the entries on December 31, 2020 and
2021.

Points to remember: Any resulting premium or discount on the date of acquisition must be amortized yearly and at the
same time, must be compared with the fair value at the end of the year.

12% 10% Face 5,000,000.00

Year Interest paid Interest Expense Amortization Carrying Value
01/01/2020 5,378,980.00
12-31-2020 600,000.00 537,898.00 - 62,102.00 5,316,878.00
12-31-2021 600,000.00 531,687.80 - 68,312.20 5,248,565.80
12-31-2022 600,000.00 524,856.58 - 75,143.42 5,173,422.38
12-31-2023 600,000.00 517,342.24 - 82,657.76 5,090,764.62
12-31-2024 600,000.00 509,076.46 - 90,923.54 4,999,841.08 round off to 5M

Entry 2020
Investment in bonds 5,378,980
Cash 5,378,980
Interest receivable 600,000
Interest income 600,000
Interest income 62,102
Investment in bonds 62,102

FV adjustment 2020: FV-CV (6,000,000-5,316,878=683,122)

Investment in bonds 683,122
UG-OCI 683,122

Entry 2021
Cash 600,000
Interest receivable 600,000
To record collection of interest accrued in 2020
Interest receivable 600,000
Interest income 600,000
Accrual of interest for 2021
Interest income 68,312
Investment in bonds 68,312
FV adjustment 2021: FV-CV (5,750,000-(6M-68,312)=181688
Investment in bonds 181,688
UG-OCI 181,688

NOTE: If the business model is to collect contractual cash flows that are solely payments of principal and interest, then its
FA@Amortized Cost. Under this scenario, all you have to do is to record the collection of interest and principal and
amortization of any premium and discount arose at the date of issuance. And based on the SUBSEQUENT
MEASUREMENT 4 (Debt Instrument FA@FVTOCI) all entries EXCEPT for the FV adjustment are the same the same.
And if being asked about the subsequent measurement of FA@amortized cost, the answers are the values under the
Carrying value column of the amortization table.

SUBSEQUENT MEASUREMENT 4 (Debt Instrument – FA@FVTPL)

On January 1, 2020, ABC purchased the debt instruments of XYZ with a face value of P5,000,000 bearing interest rate of
8% for P4,621,006 to yield 10% interest per year. The bonds mature on January 1, 2025 and pay interest annually on
December 30. On December 31, 2020, the fair value of the investment is P4,838,014 which is based on the prevailing
market rate of 9%. If the company’s business model has the objective of trading and making a profit from changes in the
fair value of the securities, what amount of unrealized gain or loss should the company disclose in its December 31, 2020
profit or loss? 217,008 unrealized gain If that is held for trading, it’s FA@FVTP/L

RECLASSIFICATION 1

All equity investment cannot be reclassified. Only debt investment can be reclassified except for debt investment
measured at FVPL by irrevocable election.

On January 1, 2020, ABC purchased bonds with face value of P4M for P3,649,600 in order to collect contractual cash flows
that are solely payments of principal and interest. The bonds are purchased to yield 10% interest. The nominal interest rate
on the bonds is 8% payable annually every December 31. On December 31, 2021, as a result of a change in the business
model for managing financial assets, the entity decided to reclassify the bonds from amortized cost to fair value. The market
value of the bonds on December 31, 2021 and 2022 respectively are 105 and 106. Prepare the entries on December 31,
2021, and on December 31, 2022.

1. The bonds shall be classified as FA @ Amortized cost. Therefore, the only income arising from this FA under this
type of business model is the interest, and the CV can be found in the amortization table. Any fair value is ignored.
2. Observed that on December 31, 2021, there is a change in business model of managing the FA to fair value.
Therefore, you need to reclassify the FA@AC to FA@FV on the reclassification date, January 1, 2022. The
reclassification date is the first day of the reporting period following the change in business model. This requires
disclosure in the year of change in FS because the change in business model is significant and demonstrable event.
3. For reclassification, entries shall be made on January 2022. A.) reclassification of investment. B.) Difference
between amortized cost and fair value (gain or loss on reclassification is possible). The by the end of the
reclassification year, entries might be necessary to comply to valuation requirements of the new classification of
investment.

RECLASSIFICATION 2

On January 1, 2020, ABC purchased bonds with face value of P5M for P6M. The bonds were acquired for the purpose of
selling in the short term or in order to realize fair value changes. On December 31, 2020, the entity changed the business
model in managing the bonds from realizing short term gains to collecting contractual cash flows that are solely payments
of principal and interest. On such date, the fair value of the bonds is P5.7M. Prepare the entries on December 31, 2020 if
the stated interest rate is 10%.
1. The bonds shall be classified as FA @ FVTPL. Therefore, the income arising from this FA under this type of
business model are the interest, and the changes in fair value. CV of this type is equivalent to the fair value at the
end of the reporting period.
2. Observed that on December 31, 2020, there is a change in business model of managing the FA to amortized cost.
Therefore, you need to reclassify the FA@FV to FA@AC on the reclassification date, January 1, 2021. The
 reclassification date is the first day of the reporting period following the change in business model. This requires
disclosure in the year of change in FS because the change in business model is significant and demonstrable event.
3. For reclassification, entries shall be made on January 2021. A.) reclassification of investment. B.) Unlike to the
requirement above, gain or loss on reclassification isn’t possible. The fair of the FA@FVTPL at the end of 2020
becomes the initial amount of the FA@AC, so the different between the FV of FA@FVTPL and the face amount
shall be the premium or discount. So, there is a need to compute for the effective interest rate in this situation. By
the end of the reclassification year, entries might be necessary to comply to valuation requirements of the new
classification of investment.