Question

Suffi Bhd is a distributor of electrical appliances and operates in central area of Selangor. The company closes its account on every 31 December. The following information is related to the equity and debt investments of Suffi Bhd: Date Transactions 5 January 2018 Suffi Bhd purchased RM5,000,000 of 12% bonds for RM5,250,000. The bonds provide the bondholders with a yield of 11% market rate. The interest is paid at the end of the year. The company holds the bonds to collect contractual cash flows. 30 September 2018 Suffi Bhd acquired 20,000 shares of Gemilang Bhd at RM3.50 per share and the transaction cost incurred was RM8,500. Suffi Bhd intended to sell the shares of Gemilang Bhd in the middle of 2019 to take advantage of the changes in the share prices. 7 October 2018 Suffi Bhd acquired 30,000 shares of Harmoni Bhd at RM2.00 per share. The brokerage fee incurred was RM6,000. Kukuh Bhd intended to establish these shares as a long term investment. 15 June 2019 Suffi Bhd sold 50% shares of Gemilang Bhd at the selling price of RM4.00 per share. Additional information: 1. At the end of 2018, Suffi Bhd received a cash dividend of RM0.40 per unit of its investment in shares of Harmoni Bhd on 31 December 2018. 2. The market values of the equity investments on 31 December 2018 are as follows: Investment Market value per share Gemilang Bhd RM4.15 Harmoni Bhd RM2.50

REQUIRED:

(a) Prepare the related journal entries of the debt investment for the year 2018.

(b) Prepare journal entries to record the purchase, the fair value adjustment and the selling of investment in Gemilang Bhd.

(c) Prepare journal entries to record the purchase, the dividend received and the fair value adjustment of investment in Harmoni Bhd.

(d) Explain FOUR (4) reasons why companies can use the financial assets to sustain the business during the COVID-19 pandemic.

Answer 1

a.

Date	Account Titles	Debit	Credit
2018		$	$
Jan 5	Bond Investments	5,000,000
	Premium on Bonds Investments	250,000
	Cash		5,250,000
Dec 31	Cash ( $ 5,000,000 x 12%)	600,000
	Premium on Bond Investments		22,500
	Interest Revenue ( $ 5,250,000 x 11 %)		577,500

b.

Date	Account Titles	Debit	Credit
2018		$	$
Sep 30	Equity Investments	78,500
	Cash		78,500
Dec 31	Equity Investments	4,500
	Unrealized Gain on Equity Investments: I/S		4,500
2019
June 15	Cash	40,000
	Loss on sale of Equity Investments	1,500
	Equity Investments		41,500

c.

Date	Account Titles	Debit	Credit
2018		$	$
Oct 7	Equity Investments	66,000
	Cash		66,000
Dec 31	Cash	12,000
	Dividend Revenue		12,000
Dec 31	Fair Value Adjustment	9,000
	Unrealized Holding Gain on Equity Investments: OCI		9,000

d. Four reasons why companies can use the financial assets to sustain the business during the COVID-19 pandemic:

• The held to maturity bond investments will provide annual cash flows for the company.
• The trading investments ( Gemilang Bhd. ) will help in generating cash by paying dividends from time to time.
• The unrealized holding gain on the Gemilang Bhd. investments will be recognized on the income statement, thereby, increasing net income and earnings per share.
• The dividend revenue from the Harmoni Bhd. investment will not only add to cash flows of the company, any unrealized holding gains will lead to increase in total stockholders equity, and resultantly the book value of the company.
• When the Pandemic ends, it is expected that these equity investments can be sold at a substantial gain, as the equity markets are going to recover.