on december 31 2016, p226 ltd purchased bonds of cz775 ltd. the bonds mature at a...

on december 31 2016, p226 ltd purchased bonds of cz775 ltd. the bonds mature at a value of 5,000,000. The stated interest is 3%. Interest paid each june 30 and December 31. The bonds were purchased to yield 3.4%. The bond will be accounted foras FVTPL and p226 follows IFRS 9.

a) What is the price of the Bond

b) Provide the 2017 Journal entries for June 30 and Dec 31 for P226. Use the net method and the standard journal entry format.

c) On December 31, 2017 the bonds were available in the secondary market at a yield rate of 3.6%. Provide the necessary December 31 2017 journal entry

Expert Solution

a). As per IFRS 9,initial measurement of a financial instrument concluded on market terms is its actual transactions price. Therefore the price of such bond shall be the actual amount paid for the bonds ie 48,35,590 (50,00,000/1.034).Since, p226 has decided to account these investments as FVTPL, the transaction costs shall be written-off to P/L immediately.

b). As per IFRS 9, where a financial instrument is credit impaired,the entity applies the effective interest rate to the amortized cost balance, which is the gross carrying amount adjusted for any loss allowance. Further, where debt instruments are measured at FVTPL, impairment of financial assets does not apply and therefore, interest shall be calculated on the gross carrying amount ie 50,00,000. Hence

On 30th June-

Bank A/c Dr 1,50,000 Dr

to Interest Income A/c 1,50,000 (3% of 50,00,000)

On 31st Dec-

Bank A/c Dr 1,50,000 Dr

to Interest Income A/c 1,50,000 (3% of 50,00,000)

Interest income shall be subsequently taked to FVTPL

c.) On subsequent recognition, under FVTPL, the investments are remeasured at their fair value with differences written-off in P/L. Therefore, on 31st december, these bonds were valued at 48,26,255 (50,00,000/1.036). The difference of 9335 (48,35,590-48,26,255) is written off to P/L immediately.

ekkarill92 answered 1 year ago

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