Question

On 1 January 2017, Entity A bought a $100,000 5% bond for $95,000, incurring issue costs of $2,000. Interest is received in arrears.

The bond will be redeemed at a premium of $5,960 over the face value on 31 December 2019.

The effective interest rate is 8%.

The fair value of the bond was as follows:

• 31 December 17 : $110,000
• 31 December 18 : $104,000

REQUIRED:

(1) Measure the amounts recognized in the Statement of Financial Position for the financial asset as at 31 December 2018 if Entity A originally planned to hold the bond until the redemption date.

(2) Measure the amounts of Gain or Loss on Remeasurement recognized in the Statement of Profit or Loss and Other Comprehensive Income for the financial asset for the year of 2018 if Entity A originally planned to hold the bond to maturity and may also sell the bond when the possibility of an investment with a higher return arises.

(3) Measure the amounts of Gain or Loss on Remeasurement recognized in the Statement of Profit or Loss and Other Comprehensive Income for the financial asset for the year 2017 if Entity A originally planned to trade the bond in the short-term, selling it for its fair value on 1 January 2018.

Answer 1

(i) Entry on 31st Dec 2017

Bonds A/c Dr $ 15,000

To Gain on Revaluation of Financial Asset A/c $15,000

(Being value of bond increases)

Entry on 31st Dec 2018

  Gain on Revaluation of Financial Asset A/c Dr $6,000

To Bonds A/c $6,000

(Being value of bond decreses)

Since bonds are planned to hold till the maturity, the bonds should be re-valued at Fair value/Market Value. and Gain on Revaluation of Financial Asset A/c balance is transfer to profit and loss account if bonds valued through FVTPL or transfer to other comprehensive account if bonds are valued through FVTOCI.

(ii) In this case, Entity originally plans to hold the bond till maturity but sell the investment on 31st Dec 2018

So value of the bond as on 31st Dec 2018 is $110,000

Cash A/c Dr $104,000

Loss on sale of investment A/c Dr $6,000

To Bonds A/c $110,000

   Loss on sale of investment A/c balance is transfer to profit and loss account if bonds valued through FVTPL or transfer to other comprehensive account if bonds are valued through FVTOCI.

(iii) If entity is plans to hold to bonds for trade, then bonds should measure at amortised cost.

Here bonds are purchased at $95,000

In this case entity sales the bond as on 31st Dec 2017

Cash A/c Dr $110,000

To Gain on sale bonds A/c $15,000

To Bonds A/c $95,000

In this case Gain on sale bonds should transfer to profit and loss account.