FINANCIAL ASSETS AT AMORTIZED COST

THEORIES
1. Bond investments held for collection are reported at
A. Fair value
B. Amortized cost
C. Net realizable value
D. The lower of amortized cost and fair value

2. Which of the following statements is correct about the effective interest method of amortization?
A. Amortization of discount decreases from period to period.
B. Amortization of premium increases from period to period.
C. The effective interest method applied to bond investments is different from that applied to bonds 
payable.
D. The effective interest method applies the effective interest rate to the beginning carrying amount for each interest period.

3. If there is objective evidence that an impairment loss on financial asset measured at amortized cost has been incurred, the
amount of loss is measured as the difference between the
A. carrying amount and the 
absolute amount of estimated cash flows.
B. carrying amount and the 
present value of estimated cash flows discounted at 
the original effective interest rate.
C. carrying amount and the 
present value of estimated cash flows discounted at 
the current market rate of interest.
D. absolute amount of 
estimated cash flows and present value of estimated 
cash flows discounted at the original effective
interest 
rate.

4. The fair value option allows an entity to

A. Record income when the fair' value of the investment increases.
B. Value the debt investments at fair value in some years but not in other years.
C. Report financial instruments at fair value by recording gains and losses as a separate component of other comprehensive
income.
D. All of these are true with respect to the fair value option.

5. True or False
I. Credit risk - This is the risk that one party to a financial instrument will cause a financial loss for the other party by failing
to discharge an obligation.
II. Liquidity risk - This is the risk that an entity will encounter difficulty in meeting obligations associated with a financial
liability.
III. Market risk - This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market prices. Market risk comprises three types of risk, name) currency risk, interest
rate risk and price risk.
A. True;True;True B. False;True;True C. False;False;True D. True;False;True

B
D
B
A
A

PROBLEMS
Problem 1: (Effective interest method) On January 1,Year 1 Abu Company acquired 5-year, 15%, P8,000,000 face value bonds
for P8,274,646. Based on the company’s business model and the contractual cash flow collectible from this instrument, Abu
Company designates the bonds as bond investments at amortized cost. Interest on the bonds is payable annually on December
31.The investments were acquired at a price to yield 14%.Present value of an annuity of P1 at 14%for 5 periods is 3.43308.
REQUIRED:
(a) Prepare a schedule of amortization using the effective interest method of amortization.
(b) Prepare journal entries for Year 1 and Year 2.

Interest Premium
(a)Date Received Interest Revenue Amortization Carrying Value
01/01/Year 1 8,274,646
12/31/Year 1 1,200,000 1,158,450 41,550 8,233,096
12/31/Year 2 1,200,000 1,152,633 47,367 8,185,729
12/31/Year 3 1,200,000 1,146,002 53,998 8,131,731
12/31/Year 4 1,200,000 1,138,442 61,558 8,070,173
12/31/Year 5 1,200,000 1,129,827* 70,173* 8,000,000
*rounded off.

(b)
Year 1
Jan. 1 Debt Investments at Amortized Cost 8,274,646
Cash 8,274,646
Dec. 31 Cash 1,200,000
Debt Investments at Amortized Cost 41,550
Interest Revenue 1,158,450
Year 2
Dec. 31 Cash 1,200,000
Debt Investments at Amortized Cost 47,367
Interest Revenue 1,152,633

Financial assets at amortized cost Page 1 of 10

Problem 2: (Investment in Bonds-at PL-vs OCI-vs amortized cost) On January 1, 20x2, Bella Corporation purchased
P1,000,000 8% bonds for P924,164 (including broker’s commission of P50,000). The bonds were purchased to yield 10%. Interest is
payable annually every January 1. The bonds mature on January 1, 20x7.

Quoted price of the bonds as of dates indicated follows:

December 31, 20x2 98.0
December 31, 20x3 99.0

REQUIRED:
A. Prepare the journal entries on the books of Bella Corporation to record the following: (Round off present value factors to four
decimal places)S
1. Purchase of the investment on January 1, 20x2;
2. Accrual of interest income on December 31, 20x2;
3. Amortization of premium or discount on December 31, 20x2; and
4. Fair value adjustment as of December 31, 20x2

Under the following assumptions:

a. The investment is designated as FA @ FVTPL;
b. The investment is available-for-sale; and
c. The investment is held-to-maturity

B. Compute for the carrying amount of the investment in bonds at December 31, 20x2 if:
a. The investment is designated as FA @ FVTPL;
b. The investment is available-for-sale; and
c. The investments is held-to-maturity

C. On December 31, 20x3, the entire bonds were sold plus accrued interest.
Solution Guide:
Requirement A

FA@FVTPL Available for Sale (AFS) (FA @ OCI) Held to Maturity (HTM)

A.1) Purchase of investment:

FA@FVTPL P874,164 AFS securities P924,164 HTM securities P924,164

Commission exp. 50,000 Cash P924,164 Cash P924,164
Cash P924,164

A.2) Accrual of interest:

Interest receivable P80,000 Interest receivable P80,000 Interest receivable P80,000

Interest income P80,000 Interest income P80,000 Interest income P80,000

A.3) Amortization of discount (see

schedule below):

No entry AFS securities P12,416 HTM securities P12,416

Interest income P12,416 Interest income P12,416

A.4) FV adjustment:

FA@FVTPL P105,836* AFS securities P43,420** No entry

FV adj. gain (P/L) P105,836 FV adj. G/L (OCI) P43,420

* (P980,000 - P874,164) ** (P980,000 - P936,580)

Requirement B

Carrying amount, 12/31/x2

FA@FVTPL Fair value P980,000
Available for Sale (AFS) Fair value P980,000
Held to Maturity (HTM) Amortized cost P936,580

Financial assets at amortized cost Page 2 of 10

Requirement C

FA@FVTPL Available for Sale (AFS) Held to Maturity (HTM)

To update amortization To update amortization To update amortization

No entry AFS securities P13,658 HTM securities P13,658

Interest income P13,658 Interest income P13,658

FV adjustment before sale FV adjustment before sale FV adjustment before sale

No entry FV adj. G/L (OCI) P3,658* No entry

AFS securities P3,658

* (P990,000 - P993,658)

Disposal entry Disposal entry Disposal entry

Cash P1,070,000 Cash P1,070,000 Cash P1,070,000

FA@FVTPL P980,000 FV adj. G/L (OCI) 39,762 HTM securities P950,238
Interest income 80,000 AFS securities P990,000 Interest income 80,000
Gain on sale of TS 10,000 Interest income 80,000 Gain on sale of 39,762
Gain on sale of AFS (P/L) 39,762

Amortization schedule:
Date EI (10%) NI (8%) Disc. Amort. Amortized cost
1/1/20x2 P 924,164
12/31/20x2 P92,416 P80,000 P12,416 936,580
12/31/20x3 93,658 80,000 13,658 950,238
12/31/20x4 95,024 80,000 15,024 965,262
12/31/20x5 96,526 80,000 16,526 981,788
12/31/20x6 98,212 80,000 18,212 1,000,000

Problem 3: (Serial Bonds) On January 1, 2010, Jessa Company purchased serial bonds with face value of P3,000,000 and stated
12% interest payable annually every December 31. The bonds are to be held to maturity with a 10% effective yield. The bonds
mature at an annual installment of P1,000,000 every December 31. The rounded present value of 1 at 10% for:
One period 0.91
Two periods 0.83
Three periods 0.75

Required:
a. What is the purchase price of the serial bonds on January 1, 2010?
b. Prepare the journal entries in 2010.

Principal Interest
1,000,000 360,000 1,360,000 x 0.91 1,237,600
1,000,000 240,000 1,240,000 x 0.83 1,029,200
1,000,000 120,000 1,120,000 x 0.75 840,000
3,106,800

Requirement (b):
1/1/x1
Investment in bonds 3,106,800
Cash 3,106,800

12/31/x1
Cash 1,360,000
Interest income 310,680
Investment in bonds 1,049,320

Financial assets at amortized cost Page 3 of 10

Problem 4: (Reclassification of financial assets) The table below serves as guide in accounting for reclassification:
From To Adjustment
Amortized cost Fair value through profit or loss Difference between FV and amortized cost
is taken to profit or loss
Amortized cost Fair value through other comprehensive Difference between FV and amortized cost
income is taken to other comprehensive
income;

Effective interest rate is not adjusted

Fair value through profit or loss
Fair value through profit or loss
Fair value through other comprehensive
income
Fair value through other comprehensive
income
Fair value through other comprehensive Effective interest rate shall be
income calculated based on fair value on
reclassification date
Amortized cost Fair value on date of reclassification is the
initial amortized cost. Calculate an
effective interest rate
Amortized cost The effective interest rate is not
adjusted.
The amount accumulated in equity is
removed to adjust the asset to
amortized cost, as if it had been
designated at amortized cost from date of
initial recognition
Fair value through profit or loss Transfer the cumulative unrealized gains
and losses in OCI to profit or loss

Debt investments at amortized cost xxx

Unrealized gain on debt investment xxx
Debt investment at FV through OCI xxx
Fair value adjustment-Debt investment xxx
Reclassification shall be made prospectively from the reclassification date. The reclassification date as defined by IFRS 9 is the first
day of the first reporting period following the change in business model. Such reclassification is considered to be very infrequent.

Financial assets that are irrevocably designated or initial recognition as fair value through profit or loss. These financial assets
are measured at fair value through profit or loss “by irrevocable designation” or “by option”. This fair value option is applicable to
investments it bonds and other debt instruments which can be irrevocably designated as at fair value through profit or loss even if
the financial assets satisfy the amortization cost measurement.

This irrevocably designation is the fair value option allowed in accordance with par.4.1.5 of PFRS 9.

Case A: ABC Co. changes its business model and determines the following information:
Carrying amount of financial assets under previous classification P100,000
Fair value on reclassification date (January 1, 20X3) 120,000

Requirements: Provide the entry (entries) on reclassification date under the following scenarios:
a. Amortized cost to FVPL
b. FVPL to Amortized cost
c. Amortized cost to FVOCI (mandatory)
d. FVOCI (mandatory) to Amortized cost – the cumulative balance of gain previously recognized in equity amount to P5,000.
e. FVPL to FVOCI (mandatory)
f. FVOCI (mandatory) to FVPL – the cumulative balance of gain previously recognized in equity amount to P5,000

Solution Guide:

Scenario (a): Amortized cost to FVPL

Jan. 1, FVPL asset 120,000
20x3 Amortized cost asset 100,000
Gain on reclassification (squeeze) 20,000

Scenario (b): FVPL to Amortized cost

Jan. 1, FVPL asset 20,000
20x3 Unrealized gain – P/L 20,000
Jan. 1, Amortized cost asset 120,000
20x3 FVPL asset 120,000

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

Jan. 1, 20x3 FVOCI asset 120,000
Amortized cost asset 100,000
Gain on reclassification – OCI 20,000

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

Jan. 1, 20x3 FVOCI asset 20,000
Unrealized gain – OCI 20,000
Jan. 1, 20x3 Amortized cost asset (squeeze) 95,000
Unrealized gain – OCI (5K + 20K) 25,000
FVOCI asset(FV on reclassification date) 120,000

Scenario (e): FVPL to FVOCI (mandatory)

Jan. 1, FVPL asset 20,000
20x3 Unrealized gain – P/L 20,000
Jan. 1, FVOCI asset 120,000
20x3 FVPL asset 120,000

Financial assets at amortized cost Page 4 of 10

Scenario (f): FVOCI (mandatory) to FVPL
Jan. 1, FVOCI asset 20,000
20x3 Unrealized gain – OCI 20,000
Jan. 1, FVPL asset 120,000
20x3 FVOCI asset 120,000
Jan. 1, Unrealized gain – OCI 25,000
20x3 Gain on reclassification – P/L 25,000

"Reclassification" of financial assets.

PFRS 9, paragraph 4.4.1, provides that an entity shall reclassify financial assets only when it changes its business model for
managing the financial assets. Where reclassification occurs, Paragraph 5.6.1 provides that an entity shall apply the reclassification
prospectively from the reclassification date. The entity shall not restate any previously recognized gains, losses and interest.

As defined in Appendix A of PFRS 9, the "reclassification date" is the first day of the reporting period following the change in business
model that results in an entity reclassifying financial asset. This means that if the change in business model is in 2013, the
reclassification date is January 1, 2014, the first day of the next reporting period. However, the entity must disclose the change in
business model in the 2013 financial statements because the change in the entity's business model is a significant and demonstrable
event. The Application Guidance B4.4.1 of PFRS 9 makes it clear that changes in an entity's business model in managing its financial
assets are expected to be infrequent.

Reclassification of financial asset "from fair value to amortized cost".

PFRS 9, paragraph 5.6.3, provides that when an entity reclassifies a financial asset at fair value to financial asset at amortized cost,
the fair value at the reclassification date becomes the new carrying amount of the financial asset at amortized cost.

The difference between the new carrying amount of the financial asset at amortized cost and the face value of the financial asset
shall be amortized through profit or loss over the remaining life of the financial asset using the effective interest method.

Case B: On January 1, 20X1, ABC Co. acquired 10%, P2,000,000 bonds for P1,903,926. The principal is due on January 1, 20X4
but interest is due annually starting December 31, 20X1. The yield rate on the bonds is 12%. The bonds were classified as
investment measured at amortized cost.

On September 1, 20X2, ABC Co. changed its business model. It was ascertained that the investment should be reclassified to held
for trading securities. The quoted prices were 101, 103 and 104 on September 1, 20X2, December 31, 20X2 and January 1, 20X3,
respectively.

Requirements:
a. When is the reclassification date?
b. Provide the journal entry on reclassification date.

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

Problem 5: (Fair value Option) On January 1, 20x6, ABC Company purchase 12% bonds with face amount of P5,000,000 for
P5,380,000. The bonds provide an effective yield of 10%. The bonds are dated January 1, 20x5, mature on January 1, 2021 and
pay interest annually on December 31 on each year. The bond are quoted at 120 on December 31, 20x6. The entity has elected the
fair value option for the bond investment. What total income should be reported for 20x6?

Answer
5,000,000 x 120 = 6,000,000 – 5,380,000 P620,000 gain from change in FV
Interest income (5M x 12%) 600,000
P1,220,000

Financial assets at amortized cost Page 5 of 10

Problem 6: (Impairment Loss)

IFRS 9 offers two approaches:

1. General model for measuring a loss allowance:
This model recognizes loss allowance depending on the stage in which the financial asset is. There are 3 stages:
o Stage 1 – Performing assets: Loss allowance is recognized in the amount of 12-month expected credit loss;
o Stage 2 – Financial assets with significantly increased credit risk: Loss allowance is recognized in the
amount of lifetime expected credit loss, and
o Stage 3 – Credit-impaired financial assets: Loss allowance is recognized in the amount of lifetime expected
credit loss and interest revenue is recognized based on amortized cost.
2. Simplified model:
You don’t need to determine the stage of a financial asset, because a loss allowance is recognized always at a lifetime
expected credit loss.
Impairment
Impairment of financial assets is recognised in stages:

Stage 1—as soon as a financial instrument is originated or purchased, 12-month expected credit losses are recognised in profit or
loss and a loss allowance is established. This serves as a proxy for the initial expectations of credit losses. For financial assets,
interest revenue is calculated on the gross carrying amount (ie without deduction for expected credit losses).

Stage 2—if the credit risk increases significantly and is not considered low, full lifetime expected credit losses are recognised in
profit or loss. The calculation of interest revenue is the same as for Stage 1.

Stage 3—if the credit risk of a financial asset increases to the point that it is considered credit-impaired, interest revenue is
calculated based on the amortised cost (ie the gross carrying amount less the loss allowance). Financial assets in this stage will
generally be assessed individually. Lifetime expected credit losses are recognised on these financial assets.

Case 1: (Expected credit losses) ABC Co. acquires bonds with face amount of P100,000 at fair value of P100,000. The effective
interest rate is 10%, equal to the nominal interest rate. ABC Co. classifies the bonds as subsequently measured at FVOCI.

All the reporting date, the fair value of the bonds decreases to P90,000. ABC Co. estimates expected credit losses equal to 12-
month expected credit losses of P3,000.

Requirements: Prepare the year-end journal entries to recognize the impairment loss and to accrue the interest income for the
year (assume 1-year interest).

Dec. 31, 20x1 Impairment loss – P/L 3,000

Unrealized loss – OCI 7,000
Investment in bonds – FVOCI 10,000

Dec. 31, 20x1 Interest receivable 10,000

Interest income 10,000

Case 2: (Impairment and Reversal – PFRS 9) On January 1, 20x6, Albay Company acquired 12% P2,000,000 face amounts
bonds for P2,126,776. The bonds mature on December 31, 20x9. The bonds were acquired to yield 10%. Interest is payable on
December 31. The bonds are to be classified as financial asset at amortized cost.

On December 31, 20x7, after receiving the interest, the issuer of the financial instrument is in financial difficulties and it becomes
probable that an impairment loss is in financial difficulties and it becomes probable that an impairment loss should be recorded. The

Financial assets at amortized cost Page 6 of 10

company assesses that only principal amount will be received on the maturity date. The prevailing rate of interest on this date is
11%.

On December 31, 20x8, the financial condition of the borrower has improved and that it can pay its unpaid obligation including
principal and interest at maturity. The prevailing rate of interest on this date is 12%.

The following present value factors are available:

PV of 1 @10% @11% @12%
One period .9091 .9009 .8929
Two periods .8264 .8116 .7972
Three periods .7513 .7312 .7118
Four periods .6830 .6587 .6355

Required:
1. Compute for the following :
a. Impairment loss on December 31, 20x7.
b. Carrying amount on December 31, 20x7.
c. Interest income in 20x8.
d. Gain on reversal of impairment loss in 20x8.
e. Carrying amount on December 31, 20x8.
f. Interest income in 20x9.

2. Prepare journal entries in 20x7 starting with the impairment loss and 20x9.

Original Amortization Table:

Date Interest collection Interest income Premium Present value
amortization
1/1/20x6 P2,126,776
12/31/20x6 P240,000 P212,678 P27,322 2,099,454
12/31/20x7 240,000 209,945 30,055 2,069,399
12/31/20x8 240,000 206,940 33,060 2,036,339
12/31/20x9 240,000 203,634 36,339 2,000,000

Requirement No. 1a
Carrying amount, 12/31/20x7 P2,069,399
Less: PV of expected cash flows using original effective rate (P2M x .8264) 1,652,800
Impairment loss P416,599

Requirement No. 1b
After recording the impairment loss, the following revised amortization table is prepared using the original effective rate.
Date Interest income Present Value
12/31/20x7 P1,652,800
12/31/20x8 P165,280 1,818,080
12/31/20x9 181,808 2,000,000

The amortized cost is the present value in the amortization table less allowance for impairment loss.
Gross carrying amount (original amortization table) P2,069,399
Less: Allowance for credit loss, 12/31/20x7 (416,599)
Amortized cost, 12/31/20x7 P1,652,800

Requirement No. 1c
As provided under PFRS 9 paragraph 5.4.1, the interest income should be computed by multiplying the original effective rate to the
amortized cost of the credit-impaired financial asset.
Amortized cost-12/31/20x7 P1,652,800
Multiply by: Original effective rate 10%
Interest income P165,280

Requirement No. 1d
Principal P2,000,000
Add: Accrued interest (P2M x 12% x 2 years remaining unpaid interest) 480,000
Total P2,480,000
Multiply: Present value of 1 using original effective rate .9091
Total present value of future cash inflows P2,254,568
Compared with would have been CV-no impairment P2,036,339

Lower figure P2,036,339

Less: Amortized cost, 12/31/20x8 (revised amortization table) 1,818,080
Gain on reversal of impairment P218,259

Requirement No. 1e
Carrying amount – 12/31/20x8 (revised amortization table) P1,818,080
Add: Impairment reversal 218,259
Amortized Cost – 12/31/20x8 (original amortization table) P2,036,339

Requirement No. 1f
Gross carrying amount, 12/31/20x8 2,036,339
Multiply by: original effective rate 10%
Interest income, 20x9 203,634

Requirement No.2
Journal entries are:
12/31/20x7

Financial assets at amortized cost Page 7 of 10

Impairment loss P416,599
Investment in bonds-FAAC P416,599
To record the impairment loss

12/31/20x8
Investment in bonds-FAAC 165,280
Interest income (P1,652,800 x 10%) 165,280
To record the interest income

Investment in bonds-FAAC 218,259

Gain on reversal of impairment loss 218,259
To record the reversal of impairment loss

12/31/20x9
Cash 240,000
Investment in bonds-FAAC 36,336
Interest income 203,634
To record the interest income

Cash 2,000,000
Investment in bonds-FAAC 2,000,000
To record collection of principal

Problem 7: (Investment in bonds with detachable warrants) ABC Co. acquired investment in bonds with detachable warrants
for P1,050,000. The bonds have a face amount of P1,000,000. Without the detachable warrants, the bonds are selling at P950,000.
The detachable warrants have a fair value P100,000. ABC Co.’s business model requires debt instruments to be measured at
amortized cost and equity instruments at fair value.

Required: Prepare the necessary journal entries.

Notes:
1. The investment in bonds and share warrants are initially recognized at fair values. The fair value of financial assets on initial
recognition is usually equal to the transaction price.
2. Upon exercise of the share warrants, the newly acquired investment is recognized at fair value and the carrying amount of the
share warrants exercised is derecognized.
3. Upon expiration, the carrying amount of the share warrants is written-off as loss.

a. The entry to record the acquisition

Investment in bonds at amortized cost P950,000
Investment in share warrants at FVPL 100,000
Cash P1,050,000

b. Case 1: sale of warrants: Assume that the detachable warrants are subsequently sold for P120,000.
The entry to record the sale is as follows:
Cash P120,000
Investment in share warrants at FVPL P100,000
Gain on sale (squeeze) 20,000

c. Case 2: Exercise of warrants: Assume the detachable warrants are subsequently exercised and the purchase price of the
newly acquired shares is P1,000,000. The acquired shares are classified as held for trading securities.
The entry to record the exercise is as follows:
To recognize the newly acquired investment.
Held for trading securities P1,000,000
Cash P1,000,000

To derecognize the carrying amount of the share warrants exercised.

Loss on derecognition of asset –P/L P100,000
Investment in share warrants at FVPL P100,000

c. Case 3: Expiration of warrants: Assume the detachable warrants expired.

The entry to record the expiration of the warrants is as follows:

Loss on expiration of share warrants P100,000
Investment in share warrants at FVPL P100,000

Trade date accounting – under the trade date accounting, the financial asset and liability are recognized on the date the enterprise
commits to purchase.

Settlement date accounting – under the settlement date accounting, the financial asset is recognized on the date it is delivered.

Trade Date Settlement Date

Recognize Commitment date Delivery date
Derecognize Commitment date Delivery date
Changes in fair value from trade date
to settlement date (for financial
assets measured at fair value):
Purchase Recognize Recognize
Sale Ignore Ignore

Financial assets at amortized cost Page 8 of 10

Problem 8: (Trade Date Accounting and Settlement Date Accounting-Purchase Transaction)On December 29, 20X1, ABC
Co. acquires 1,000 units of an investment through a broker at P1.00 per unit, the quoted price on this date. Ownership over the
financial asset transfers to ABC Co. on January 3, 20X2. The fair values per unit on December 31, 20X1 and January 3, 20X2 are
P1.75 and P1.50, respectively.

Requirements: Provide the journal entries under the trade date accounting and the settlement date accounting assuming the
financial asset purchased is classified as subsequently measured at:
a. FVPL b. FVOCI c. Amortized cost

With Suggested Answers:

Requirement (a) Held for trading securities

Date Trade date accounting Settlement accounting
Dec. 29, Held for trading securities 1,000
20x1 Accounts payable 1,000
No entry
to record the purchase of investment

Dec. 31, Held for trading securities 750 Accounts receivable 750
20x1 Unrealized gain – P/L 750 Unrealized gain – P/L 750

to record the fair value change to record the fair value change

Jan. 3, Unrealized loss – P/L 250 Held for trading securities 1,500
20x2 Accounts payable 1,000 Unrealized loss – P/L 250
Held for trading securities 250 Accounts receivable 750
Cash in bank 1,000 Cash in bank 1,000

to record the settlement of the purchase transaction to record the purchase of investment

Requirement (b) FVOCI securities

Date Trade date accounting Settlement accounting
Dec. 29, FVOCI securities 1,000
20x1 Accounts payable 1,000
No entry
to record the purchase of investment

Dec. 31, FVOCI securities 750 Accounts receivable 750

20x1 Unrealized gain – OCI 750 Unrealized gain – OCI 750

to record the fair value change to record the fair value change

Jan. 3, Unrealized loss – OCI 250 FVOCI securities 1,500

20x2 Accounts payable 1,000 Unrealized loss – OCI 250
FVOCI securities 250 Accounts receivable 750
Cash in bank 1,000 Cash in bank 1,000

to record the settlement of the purchase transaction to record the purchase of investment

Requirement (c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. 29, Investment in bonds 1,000
20x1 Accounts payable 1,000
No entry
to record the purchase of investment

Dec. 31,
No entry No entry
20x1
Jan. 3, Accounts payable 1,000 Investment in bonds 1,000
20x2 Cash in bank 1,000 Cash in bank 1,000

to record the settlement of the purchase transaction to record the purchase of investment

Problem 8: (Trade Date Accounting and Settlement Date Accounting-Sale Transaction) On December 29, 20X1, ABC Co.
sells 1,000 units of an investment through a broker at P1.00 per unit, the quoted price on this date. The investment has a carrying
amount of P1,200. Ownership over the financial asset transfers to the buyer on January 30, 20X2. The fair values per unit on
December 31, 20X1 and January 3, 20X2 are P1.75 and P1.50, respectively.

Requirements: Provide the journal entries under the trade date accounting and the settlement date accounting assuming the
financial asset sold was classified as subsequently measured at:
a. FVPL b.1 FVOCI (mandatory-Debt) c. Amortized cost
b.2 FVOCI -Equity

With Suggested Answers:

Requirement (a) Held for trading securities

Date Trade date accounting Settlement accounting
Dec. 29, Accounts receivable 1,000 Unrealized loss – P/L 200
20x1 Realized loss on sale 200 Held for trading securities 200
Held for trading securities 1,200
to adjust the carrying amount of the investment sold to
Financial assets at amortized cost Page 9 of 10
 to derecognize the investment sold and to recognize the fair value as of trade date
gain on disposal
Dec. 31,
20x1 No entry No entry

Jan. 3, Cash 1,000 Cash 1,000

20x2 Accounts receivable 1,000 Held for trading securities 1,000

to record the settlement of the sale transaction to derecognize the investment sold and to record the
settlement of the sale transaction

Requirement (b1) FVOCI Debt securities

Date Trade date accounting Settlement accounting
Dec. 29, Accounts receivable 1,000 Unrealized loss – OCI 200
20x1 Realized loss on sale 200 FVOCI securities 200
FVOCI securities 1,200
to adjust the carrying amount of the investment sold to fair
to derecognize the investment sold and to recognize the value as of trade date
gain on disposal
Dec. 31,
20x1 No entry No entry

Jan. 3, Cash 1,000 Cash 1,000

20x2 Accounts receivable 1,000 FVOCI securities 1,000

to record the settlement of the sale transaction to derecognize the investment sold and to record the
settlement of the sale transaction

Retained earnings 200

Realized loss on sale 200

to transfer the accumulated unrealized gain to profit or

loss as a reclassification adjustment

Requirement (b2) FVOCI equity securities

Date Trade date accounting Settlement accounting
Dec. 29, Accounts receivable 1,000 Unrealized loss – OCI 200
20x1 Retained earnings 200 FVOCI securities 200
FVOCI securities 1,200
to adjust the carrying amount of the investment sold to fair
to derecognize the investment sold and to recognize the value as of trade date
gain on disposal
Dec. 31,
20x1 No entry No entry

Jan. 3, Cash 1,000 Cash 1,000

20x2 Accounts receivable 1,000 FVOCI securities 1,000

to record the settlement of the sale transaction to derecognize the investment sold and to record the
settlement of the sale transaction

Retained earnings 200

Unrealized loss -OCI 200

to transfer the accumulated unrealized gain to profit or

loss as a reclassification adjustment

Requirement (c) Amortized cost

Date Trade date accounting Settlement accounting
Dec. 29, Accounts receivable 1,000
20x1 Realized loss on sale 200
Investment in bonds 1,200
No entry

to derecognize the investment sold and to recognize the

gain on disposal
Dec. 31,
20x1 No entry No entry

Jan. 3, Cash 1,000 Cash 1,000

20x2 Accounts receivable 1,000 Realized loss on sale 200
Investment in bonds 1,200
to record the settlement of the sale transaction
to derecognize the investment sold, to record the settlement
of the sale transaction and to recognize the gain on disposal

Financial assets at amortized cost Page 10 of 10