Answer to Question #202589 in Accounting for Katrina Dahino

Question

On December 29, 2021, bifurcation Company commits itself to purchase a financial asset to be classified as held for trading for P 600,000, its fair value on commitment (traded) date. The security has a fair value of P 601,000 and P 602,000 on December 31, 2021 (Bifurcation’s financial year-end), and January 5, 2022 (settlement date), respectively

Based on the above data, answer the following:

1. If Bifurcation applies the trade date accounting method to account for regular-way purchases of its securities, how much should be recognized as trading securities on December 31, 2021?

a. P 600,000 c. P 602,000

b. P601,000 d. P 0

2. If Bifurcation applies the settlement date accounting method to account for regular-way purchase of its securities, how much should be recognized as trading securities on December 31, 2021?

a. P 600,000 c. P 602,000

b. P601,000 d. P 0

Answer 1

Solution:

1.). The correct answer is a. P 600,000.

Trade date accounting is an accounting method used to record transactions by bookkeepers as of the date at which an agreement has been entered, which is the trade date. That is, the company does not wait until the funds leave the account to record the transaction. The transaction is recorded immediately after a deal or agreement is reached. Therefore, under the trade date accounting, the company should recognize the amount of P 600,000, which was the fair value on the commitment (traded) date.

 

2.). The correct answer is d. P 0.

Settlement date accounting is a type of accounting practice that bookkeepers use to record transactions in the books of accounts at the point where the given transactions have been fulfilled or settled. The company cannot record a transaction immediately after an agreement is reached but when it is fulfilled or settled. Therefore, under the settlement date method, the company will not recognize any trading securities on December 31, 2021, since the settlement date is on January 5, 2022.