Question

Question 2 GHI Ltd is a local media enterprise which has its shares listed on Hong Kong Stock Exchange. It has the following financial instruments

Ø Owing to expand further its business enterprise, it issued 2 years bonds on April 1, 2019. The bond had principal amount of $10 million and carry a fixed interest of 6% per annum. Interest is paid semi-annually on 30 September and 31 March. The market interest rate for similar debts was 8% per annum.

GHI Ltd has invested in the following companies

1. There was a bonds issued by PHA Trading Ltd. On 1 October 2018, GHI acquired a 10% $400,000 bond with 3 years term at its fair value. The bond will be repurchased at its nominal amount. Interest is payable at end of each year, in arrears. GHI Ltd’s target is to hold such bond to collect cash.

2. LCD Ltd is a company listed on Hong Kong Stock Exchange and has total 800,000 issued ordinary shares. On 1 August 2019, GHI Ltd invested in 200,000 ordinary shares of LCD Ltd at its listed market price of $80 each, plus transaction costs $100,000. GHI Ltd intended to hold the shares for long term purpose. On 30 September 2019, the share price of LCD Ltd roses to $84 each.

Required a. Assume GHI Ltd measured its issued bonds at amortized cost. Prepare journal entries to account for its bond transactions during the year ended 30 September 2019 (Narratives are not required, all workings must be shown)

b. Recommend and briefly explain the appropriate measurement bases of investment made by GHI Ltd in both PHA Trading Ltd and LCD Ltd

c. `All financial liabilities must be measured at amortized cost’. Discuss whether you agree with this statement.

Answer 1

Answer-a:

Bond issue price = $600,000/2 * [1 - [1 / (1 + 0.08/2)^2*2]] / (0.08/2) + [$10,000,000 / ((1 + 0.08/2)^2*2) = $9,637,010

Discount on bond = $10,000,000 - 9,637,010 = $362,990

Date	Account Name	Debit	Credit
Apr.01, 2019	Cash	$         9,637,010
	Discount on bond payable	362,990
	Bonds payable		$ 10,000,000
9/30/2019	Interest expense	385,480
	Discount on bond payable		85,480
	Cash		300,000

Working:

Paymnt No.	Interest payment	Interest exp	amortization of bond dis	Bal. in bond dis	Bond payable	Carrying value of bond
0				$   362,990	$ 10,000,000	$             9,637,010
1	$       300,000	$    385,480	$         85,480	277,510	10,000,000	9,722,490
2	300,000	388,900	88,900	188,610	10,000,000	9,811,390
3	300,000	392,456	92,456	96,154	10,000,000	9,903,846
4	300,000	396,154	96,154	-	10,000,000	10,000,000

Answer-b:

(i) This type of security is reported as a non-current asset and have an amortized cost on a company's financial statements and is generally in the form of a debt security with a specific maturity date. This is held-to-maturity investment.

Hence, Investment in bond of PHA Trading Ltd should be reported at amortized cost. Earned interest income should appear on the company's income statement.

(ii) Available for sale long-term investments are recorded at cost when purchased and subsequently adjusted to reflect their fair values at the end of the reporting period. Unrealized holding gains or losses are kept as "other comprehensive income" until the long-term investment has been sold.

Hence, investment in share of LCD Ltd should be measured at fair value.