Question

The following information relates to the debt investments of Sarasota Inc. during a recent year:

1. On February 1, the company purchased Gibbons Corp. 10% bonds with a face value of $324,000 at 100 plus accrued interest. Interest is payable on April 1 and October 1.

2. On April 1, semi-annual interest was received on the Gibbons bonds.

3. On June 15, Sampson Inc. 9% bonds were purchased. The $216,000 par-value bonds were purchased at 100 plus accrued interest. Interest dates are June 1 and December 1.

4. On August 31, Gibbons Corp. bonds with a par value of $65,000 purchased on February 1 were sold at 99 plus accrued interest.

5. On October 1, semi-annual interest was received on the remaining Gibbons Corp. bonds.

6. On December 1, semi-annual interest was received on the Sampson Inc. bonds.

7. On December 31, the fair values of the bonds purchased on February 1 and June 15 were 98.5 and 101, respectively. A

ssume the investments are accounted for under the recognition and measurement requirements of IFRS 9 Financial Instruments. Assume the investments are NOT adjusted for Present Value. Required:

a) Prepare all journal entries that you consider necessary, including December 31 yearend entries, assuming these investments are accounted for at FV-NI and interest income is not reported separately from other related investment gains and losses.

b) Assume instead that Sarasota manages these investments based on their yield to maturity (Amortized Cost) Prepare all journal entries that you consider necessary, including December 31 adjusting entries.

Answer 1

Assume the investments are accounted for under the recognition and measurement requirements of IFRS 9 Financial Instruments. Assume the investments are NOT adjusted for Present Value. Required:
a) Prepare all journal entries that you consider necessary, including December 31 yearend entries, assuming these investments are accounted for at FV-NI and interest income is not reported separately from other related investment gains and losses.
Feb-01
FV-NI Investments….Dr	$          324,000.00
Interest Receivable….Dr (($324000*10%)*4/12)	$            10,800.00
To Cash…..Cr		$    334,800.00
Apr-01
Cash…..Dr	$            16,200.00
To Interest Receivable…..Cr (($324000*10%)*6/12)		$      16,200.00
Jun-15
FV-NI Investments…..Dr	$          216,000.00
Inteest Receivable…..Dr (($216000*9%)*.5/12)	$                  810.00
To Cash…..Cr		$    216,810.00
Aug-31
Cash…..Dr ($65000*99%)	$            64,350.00
Investment income or Loss…..Dr	$              3,358.34
To Interest Receivable…..Cr (($65000*10%)*5/12))		$         2,708.34
To FV-NI Investments……Cr		$      65,000.00
Oct-01
Cash…..Dr	$            12,950.00
To Investment Income or Loss…..Cr		$      12,950.00
($324,000-$65,000)X10%X6/12
Dec-01
Cash…..Dr	$              9,720.00
To Interest Receivable…..Cr		$            810.00
To investment Income or Loss…..Cr (($216000*9%)*5.5/12))		$         8,910.00
Dec-31
Interest Receivable (($259000*10%)*3/12)+(($216000*9%)*1/12)	$              8,095.00
To Investment Income or Loss…..Cr		$         8,095.00
(to record adjustment)
Dec-31
Gibbons Bonds ($259000*98.5%)	$          255,115.00
Sampson Bonds ($216000*101%)	$          218,160.00
b) Assume instead that Sarasota manages these investments based on their yield to maturity (Amortized Cost) Prepare all journal entries that you consider necessary, including December 31 adjusting entries.
Feb-01
Bond investment at Amortised Cost….Dr
Interest Receivable…..Dr
To Cash…..Cr
Apr-01
Cash….Dr
To Interest Receivable….Cr
To Interest Income…..Cr
Jun-15
Bond Investment at Amortised Cost….Dr
Interest Receivable…..Dr
To Cash…..Dr
Aug-31
Cash…..Dr
Loss on Investment on Sale…..Dr
To interest Income…..Cr
To bond Investment at Amortised Cost…..Cr
Oct-01
Cash…..Dr
Interest Income…..Cr
Dec-01
Cash….Dr
To Interest Receivable……Cr
To interest Income……Cr
Dec-31
Interest Receivable…..Dr
To Interest Income…..Cr