In: Accounting
2. Abacus Property Ltd also bought government bonds of the Kingdom of Enchancia for $2,000,333 accounted for using amortized cost on 1 January 2020. Due to uncertainty around royal succession, Abacus estimates that there is a 5% chance of default in the next 12 months which would result in a cash shortfall of $1,800,000 and a 10% chance of cash shortfall of $1,000,000. Record the appropriate journal entries for the year ending 31 December 2020.
3. Following from 2 above, explain how this differs from the measurement of most other accounting values and whether you view this as consistent with the conceptual framework.
2 - Government bond purchase - DR - 2000333
To cash and bank - CR - 2000333
DR - Decrease in Fair Value (Income Statement) 1800000
CR - Financial Asset/Financial Financial Liability (SOFP) 1800000
DR - Decrease in Fair Value (Income Statement) 1000000
CR - Financial Asset/Financial Financial Liability (SOFP) 1000000
3.
When an entity first recognises a financial asset, it classifies it based on the entity’s business model for managing the asset and the asset’s contractual cash flow characteristics, as follows: