Far08 240831 133026

Page 1 of 4 | FAR Physical Handout 08
Investments in Debt Securities and Reclassification

V. GARCIA & F. CALIWAN

THEORY QUESTIONS
1. An entity had the following investments in debt securities acquired during the year:
Business Model SPPI Test
Investment 1 Held-to-maturity Failed
Investment 2 Held-to-maturity Passed
Which of the following correctly describes the accounting treatment for these investments?
a. Investment 1: Amortized Cost; Investment 2: Amortized Cost
b. Investment 1: FVTPL; Investment 2: Amortized Cost
c. Investment 1: FVTOCI; Investment 2: Amortized Cost
d. Investment 1: Amortized Cost; Investment 2: FVTPL
2. An entity had the following investments in debt securities acquired during the year:
Business Model SPPI Test
Investment 1 Both held-to-maturity Passed
and held-for-selling
Investment 2 Both held-to-maturity Failed
and held-for-selling
Which of the following correctly describes the accounting treatment for these investments?
a. Investment 1: Amortized Cost; Investment 2: FVTOCI
b. Investment 1: FVTPL; Investment 2: FVTOCI
c. Investment 1: FVTOCI; Investment 2: FVTOCI
d. Investment 1: FVTOCI; Investment 2: FVTPL
3. The transaction costs incurred in purchasing investments in debt securities are expensed under which of the
following accounting categories?
a. FVTPL
b. FVTOCI
c. Amortized Cost
d. Both b and c
4. Which of the following amounts coming from investment in debt securities at amortized cost is/are reported
in profit or loss?
Amount 1: Unrealized gain or loss on changes in fair value
Amount 2: Realized gain or loss on sale
a. Amount 1 only
b. Amount 2 only
c. Both Amounts 1 and 2
d. Neither Amount 1 nor 2
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5. Statement 1: If a FVTOCI debt securities’ fair value is higher than its amortized cost, the difference is
considered as cumulative unrealized gains to be reported in shareholders’ equity.
Statement 2: If the fair value of FVTOCI debt securities is lower than its amortized cost, the difference is
considered as cumulative unrealized loss to be reported in shareholders’ equity.
a. True, True
b. True, False
c. False, True
d. False, False
6. Statement 1: If, during the current year, an FVTOCI debt securities’ cumulative unrealized gains – OCI
increased from last year, the amount of increase is reported as unrealized loss in OCI for the current year.
Statement 2: If, during the current year, an FVTOCI debt securities’ cumulative unrealized gains – OCI
decreased from last year, the amount of decrease is reported as unrealized loss in OCI for the current year.
a. True, True
b. True, False
c. False, True
d. False, False
8. An entity changed its business model on November 10, 2022. When should be its reclassification date?
a. December 31, 2022
b. January 1, 2022
c. January 1, 2023
d. December 31, 2023
9. Statement 1: Investments in equity securities can be reclassified.
Statement 2: Investments in debt securities can be reclassified.
a. True, True
b. True, False
c. False, True
d. False, False
10. An entity properly reclassified its amortized cost investments to FVTPL classification. In relation to this, which
of the following statements is/are true?
I. An unrealized gain or loss shall be recognized in profit or loss on the reclassification date.
II. The amortization table that the entity is using before the reclassification will still continue to be used by
the entity.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
11. An entity properly reclassified its amortized cost investments to FVTOCI classification. In relation to this, which
of the following statements is/are true?
I. The FVTOCI investment shall be measured equal to its fair value on reclassification date, with the
difference to be recorded as gain or loss and directly recognized in equity.
II. The amortization table that the entity is using before the reclassification will still continue to be used by
the entity.
a. I only


b. II only
c. Both I and II
d. Neither I nor II
12. An entity properly reclassified its FVTOCI investments to FVTPL classification. In relation to this, which of the
following statements is/are true?
I. The FVTPL investment shall be measured equal to its fair value on reclassification date, with the
difference to be recorded in profit or loss.
II. The amortization table that the entity is using before the reclassification will not be used moving
forward.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
PROBLEMS
1. As of January 1, 2022, GERALDINA Company had the following investments in debt securities, all to be
accounted for at FVTPL and all have December 31 as interest payment date:
Face Original Quoted Stated
Issuer Amount Cost Price Rate
BBB Company P3,000,000 99.80 97.50 9%
CCC Company 6,000,000 97.60 98.90 9%
DDD Company 5,000,000 102.40 101.90 10%
EEE Company 2,000,000 104.80 105.60 12%
During 2022, the following transactions occurred:
• P3,000,000 of CCC Company’s bonds were sold last June 30, 2022 for 102.70, including accrued interest.
• P4,000,000 additional BBB Company’s bonds were acquired last October 31, 2022 for 99.70, plus accrued
interest.
As of December 31, 2022, the debt securities had the following quoted prices:
Issuer Quoted Price Issuer Quoted Price
BBB Company 100.20 DDD Company 104.50
CCC Company 98.20 EEE Company 105.20
The amount of total interest income for the year 2022 shall be
a. P1,585,000 c. P1,445,000
b. P1,475,000 d. P1,310,000
Net unrealized gain or loss to be recognized on December 31, 2022 shall be
a. P256,000 net unrealized gain c. P202,000 net unrealized gain
b. P256,000 net unrealized loss c. P256,000 net unrealized loss
2. On January 1, 2022, THIMPHU Company acquired four-year, P7,000,000 face amount government bonds
when prevailing market rates averaged 12%. The investment is accounted for at amortized cost. Interest of
10% is payable every June 30 and December 31 of each year. On November 1, 2023, P3,000,000 face
amount of the bonds was sold by receiving a total amount of 99.35.


Total interest income for the year 2022 shall be

a. P799,649 c. P803,525
b. P788,972 d. P790,473
The carrying amount of the investment as of December 31, 2022 shall be

a. P6,655,785 c. P6,763,391
b. P6,663,742 d. P6,609,231
The gain or loss from the November 1, 2023 sale shall be
a. P8,073 gain c. P14,643 gain
b. P8,073 loss d. P14,643 loss
Total interest income for the year 2023 shall be
a. P809,742 c. P801,655
b. P805,296 d. P744,182
a. P3,852,792 c. P3,861,394
b. P3,868,309 d. P3,864,795
3. At the beginning of 2022, LUSAKA Company invested in a seven-year government bonds with face amount
of P8,000,000, to be accounted for at FVTOCI. Market yields averaged 12% as of that date. The bonds were
originally dated January 1, 2021. On the other hand, interest of 11% is payable every December 31 of each
year. As of December 31, 2022, 2023, 2024 and 2025, quoted prices were 96.15, 96.00, 97.10 and 98.60,
respectively.
Interest income for the year 2022 shall be
a. P880,000 c. P920,530
b. P916,188 d. P960,000
a. P7,680,000 c. P7,692,000
b. P7,711,616 d. P7,671,086
The amount of unrealized gain or loss to be recognized in 2023 OCI shall be
a. P31,616 unrealized gain c. P52,530 unrealized gain
b. P31,616 unrealized loss d. P52,530 unrealized loss
The cumulative amount of unrealized gain or loss in December 31, 2023 equity shall be
a. P31,616 unrealized gain c. P52,530 unrealized gain
b. P31,616 unrealized loss d. P52,530 unrealized loss
Assuming that the investment was sold on January 1, 2024 for P7,750,000, the net amount of gain or loss on
sale to be recognized in profit or loss shall be
a. P10,989 net gain c. P38,384 net gain
b. P10,989 net loss d. P38,384 net loss
Assuming that the investment was sold on January 1, 2024 for P7,640,000, the net amount of gain or loss on
sale to be recognized in profit or loss shall be
a. P80,148 net gain c. P71,616 net gain
b. P80,148 net loss d. P71,616 net loss


----- END OF HANDOUTS -----


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Page 1 of 4 | FAR Physical Handout 08

Investments in Debt Securities and Reclassification

Investments in Debt Securities and Reclassification

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

V. GARCIA & F. CALIWAN

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

V. GARCIA & F. CALIWAN

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

V. GARCIA & F. CALIWAN

Total interest income for the year 2022 shall be

The carrying amount of the investment as of December 31, 2022 shall be

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

V. GARCIA & F. CALIWAN

----- END OF HANDOUTS -----

REO CPA REVIEW PHILIPPINES Effectiveness. Efficiency. Convenience

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