Clarity Corp. has changed its business model. As a result, a $2,150,000 investme
ID: 2424273 • Letter: C
Question
Clarity Corp. has changed its business model. As a result, a $2,150,000 investment in 4.5% bonds classified as FVOCI must be reclassified as fair value through profit and loss (FVPL). The market rate at the time of the investment for similar bonds is 3.5%. The bonds have two years left until maturity, and they pay interest semi-annually. The fair value of the bonds is $2,200,000.
Clarity also sold a separate equity investment that was irrevocably elected to be classified as FVOCI. The fair value of the investment at the time of sale was $708,000. Transaction costs incurred on the sale were $4,500. At the time of the sale, the investment was carried in the statement of financial position at $685,000. Prior to any adjustments to account for the sale of this investment, the balance in the reserves account pertaining to the investment is $14,000 debit. Clarity’s accounting policy is to transfer the net amount of reserves to retained earnings on derecognition of the investment.
By what amount will the reserves account (AOCI) change for Clarity as a result of these two events?
a) $183 DR
b) $8,817 DR
c) $17,817 DR
d) $9,000 CR
Explanation / Answer
D) $9,000 CR
No Impact of bond.
Profit on Equity = 708000-685000 = 23000
23000 should be credited
14000 Debit
So, 9000 would be credited.