Question

Presented below is an amortization schedule related to Stock Company’s 5-year, $200,000 bond with a 7% stated interest rate and a 5% market interest rate yield, purchased on December 31, 2017, for $217,320. The interest is paid each December 31, and the investor receives the first interest payment on Dec 31, 2018.

The following schedule presents the fair value of the bonds at year-end.

	31.12.2018	31.12.2019
Fair value	213,000	215,000

Required:

1. Prepare the journal entries related to bonds for 2017 and 2018 assuming the bonds are classified as financial assets at amortized cost.

2. Prepare the journal entries related to the fair value adjustment for the bonds on 31 December 2019 assuming these bonds are classified as financial assets at fair value through profit or loss (FVTPL).

3. Prepare the journal entries related to the fair value adjustment for 2018 and sale of bonds for 2019 assuming these bonds are classified as financial assets at fair value through other comprehensive income (FVTOCI). The bonds are sold at the fair value on 31 December 2019.

Answer 1

a)Bonds if classified at Amortised cost:-

bond must be recognised at fair value, calculation of fair value:-

given, interest payable on bond is 7%, and market interest rate is 5%

the interest recieved on the bonds must be discounted at market rate

interest = 200000*7% p.a i.e, 14000.

therefore 14000 * present value of a 1$ for 5 years annuity

i.e, 14000*4.3295=60620

and the pricipal amount due to b recieved in 5 years time is to be discounted

200000*07835=156700

here we can see that bond have been purchased at its fair value of 60620+156700

THEREFOre bond is to be recognised at fair value(in this case also purchse price) of $217320

JOURNAL ENTRIES for 2017:-

5 year bond a/c Dr 217320

To Bank a/c 217320

(benig 5 year bond purchased)

JOURNAL ENTRIES FOR 2018:-

5 year bond a/c Dr 10866

To interest a/c 10866

(being interest recognised at market interest rate on the fair value of bond

i.e, 217320*5%=10866)

interest a/c dr 10866

to p&l a/c 10866

(being income recognised in profit and loss a/c)

Bank a/c Dr 14000

to 5 year bond a/c 14000

(being interest recieved from company on bond recognised in 5 year bond a/c)

b)bonds if classified at FVTPL:-

JOURNAL ENTRIES for 2017:-

5 year bond a/c Dr 217320

To Bank a/c 217320

(benig 5 year bond purchased)

JOURNAL ENTRIES for 2018:-

P AND L a/c Dr 4320

To 5 year bond a/c 4320

(being loss on fair value recognised)

JOURNAL ENTRIES for 2019:-

5 year bond a/c Dr 2000

To P AND L a/c 2000

(being gain on fair value recognised)

c)Bonds if classified at FVTOCI:-

JOURNAL ENTRIES for 2018:-

5 year bond a/c Dr 4320

To Other Comprehensive inome 4320

(benig loss on fair value recognised in OCI, carrying amount=213000)

JOURNAL ENTRIES for 2019:-

when bonds are sold:-

Bank a/c Dr 215000

To 5 year bond a/c 213000

To OCI 2000