Question

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.

Answer 1

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:

• Amortised cost—a financial asset is measured at amortised cost if both of the following conditions are met:
  • the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
  • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

• Fair value through other comprehensive income—financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
• Fair value through profit or loss—any financial assets that are not held in one of the two business models mentioned are measured at fair value through profit or loss.