Question

Problem 4

On December 31, 20x0, the Smith Corporation purchased bonds of another company. The bonds had a face value of $1,000,000, mature on December 31, 20x13, and pay a coupon rate of 3.6% semi-annually on June 30 and Dec 31. The bonds were yielding 3% on the date of purchase. Smith paid $7,300 in transaction costs.

On December 31, 20x1, the bonds are trading at 102.

On January 2, 20x2, the bonds are sold at 102.2 less $8,000 in transaction costs.

Required –

Prepare all journal entries for December 31, 20x0 through January 2, 20x2 on the assumption that the securities are classified as…

a. Amortized Cost

b. FVTOCI

Answer 1

Bonds at Amortised Cost
Date	Journal Entry	Amount	Amount
31/12/2010	Investment in Bonds	1,000,000
	To Bank		1,000,000
	(Being Bonds Purchased)
30/06/2011	Bonds	36,000
	To Interest		36,000
	(Being Interest due)
	Interest	36,000
	To Cash		36,000
	(Being Interest received)
31/12/2011	Bonds	36,000
	To Interest		36,000
	(Being Interest due)
	Interest	36,000
	To Cash		36,000
	(Being Interest received)
2/01/2012	Bank	1,022,000
	To Bonds		1,022,000
	(Being Bonds Sold)
Bonds at FVTOCI
Date	Journal Entry	Amount	Amount
31/12/2010	Investment in Bonds	1,000,000
	Transation Cost	7,300
	To Bank		1,007,300
	(Being Bonds Purchased)
30/06/2011	Bonds	36,000
	To Interest		36,000
	(Being Interest due)
	Interest	36,000
	To Cash		36,000
	(Being Interest received)
31/12/2011	Bonds	36,000
	To Interest		36,000
	(Being Interest due)
	Interest	36,000
	To Cash		36,000
	(Being Interest received)
	Bonds	20,000
	To Fair Value Gain		20,000
	(Being Gain recognsied)
	Fair Value Gain	20,000
	To OCI		20,000
	(Being gain transferd to OCI A/c)
	OCI	20,000
	To Fair Value Reserve		20,000
	(Being Balance of OCI A/c transferred to next year)
2/01/2012	Bank	1,014,000
	To Transaction Cost		8,000
	To Bonds		1,022,000
	(Being Bonds Sold)
	Gain on Sale	2,000
	To OCI		2,000
	(Being Gain on sale of Bonds recognsied)