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Presented below is an amortization schedule related to Stock Company’s 5-year, $200,000 bond with a 7%...

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.

  1. 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).

  1. 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.

Part B:

Task Ltd. has the following transactions in purchasing and selling the ordinary shares of Sugar Company:

15. Jul. 2018          Purchased 12,000 shares of Sugar Company @ $100 per share.

31. Dec. 2018         The fair value of the ordinary shares of Sugar Company is $160 per share.

15. Jan. 2019         Sold the 4,000 ordinary shares of Sugar Company @ $150 per share.

Required:

Task Ltd. classifies the investment in the ordinary shares of Sugar Company as financial assets at fair value through other comprehensive income in accordance with HKFRS 9. Prepare journal entries for Task Ltd. to record the above transactions for 2018 and 2019.

Part C:

On 1 January 2018, Wet Co. acquired a loan investment of $1,600,000 with interest payable annual at 8%. The investment is measured at amortised cost.

At 1 January 2018, there is a 5% probability that the borrower will default on the loan during 2018 resulting in a 100% loss.

At 31 December 2018 there is 3% probability that the borrower will default on the loan before 31 December 2019 resulting in a 100% loss. There is no significant increase in the borrower’s credit risk during 2018.

Required:

In accordance with HKFRS 9, what impairment loss is recognised at initial recognition and on 31 December 2018?

Solutions

Expert Solution

ekkarill92 answered 2 years ago
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