Question

Part b

i. On the other hand, MNO Ltd invested in the debenture issued by BU Limited. On 1 January 2019, it purchased a 10% 500,000 debenture with a four years term at its par value which was also its fair value on the date of purchase. The debenture will be redeemed at par value four years later. Interest is payable at the end of each year, MNO Ltd intends to hold this debenture for earning stable interest income and get the proceeds of par value on maturity date.

Required
Justify whether MNO Ltd should measure the investment in debenture issued by BU Limited at amortized cost.
Note: calculation is not required in this part

ii. Assume MNO Ltd hold the investment in debenture issued by BU Limited for collection and selling purpose, show any journal entry required if the fair value of the debenture were $540,000 as on December 31, 2019.

Part c

PQR Ltd is a local media enterprise which has its shares listed on Hong Kong Stock Exchange. It has the following financial instruments

Owing to expand further its business enterprise, it issued a 2 years bond on April 1, 2019. The bond had principal amount of $10 million and carry a fixed interest of 8% per annum. Interest is paid semi-annually on 30 September and 31 March. The market interest rate for similar debts was 10% per annum.

Required
Assume PQR Ltd measured its issued bonds at amortized cost. Prepare journal entries to account for its bond transactions during the year from initial recognition until 30 September 2019.
Note: Narratives are not required, all workings must be shown, marks will be granted on the construction of amortization table and the price of bond

Part d
List ANY THREE possible situations that the investment in financial asset should be impaired.

Answer 1

PART-B(i)

1) If the business model is such that the objective is to earn Interest income on the instruments and

2)the instrument generates cash flows only from Interest and Principal

3) On specified dates

If the above three conditions are satisfied then financial asset will be measued at Amortised Cost. In the present situation,MNO Ltd intends to hold this debenture for earning stable interest income and get the proceeds of par value on maturity date. So, all the above conditions are satisfied then MNO Ltd should measure the investment in debenture issued by BU Limited at amortized cost.

(ii) If MNO Ltd hold the investment in debenture issued by BU Limited for collection and selling purpose then they are revalued and any fair value gain/loss is transferred to Profit and Loss account.The journal entry would be as follows:

Date	Particulars	Debit $	Credit $
Jan,01,2019	10% debentures	500000
	To Bank		500000
Dec,31,2019	10% debentures	40000
	To Realisation gain(P&L)		40000
	(Being fair value realisation gain on debentures transferred to P &L account at year end)	p