Question

ABC company has the following financial instruments

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.

ABC company has invested in the following companies

1. There was a bonds issued by PHA Trading Ltd. On 1 October 2018, ABC 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, ABC company invested in 200,000 ordinary shares of LCD Ltd at its listed market price of $80 each, plus transaction costs $100,000.ABC company 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 ABC company 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)

Answer 1

	Issued price of bond: semi-interest * PVIFA(m.yield,pd.)+
	Par value * PVIF(m.yield,pd.)=
	10m*3% * PVIFA(4%,4) + 10m * PVIF(4%,4)=
	(300000*3.6299) + (10000000* 0.8548)= 9636970
Journal Entries (ABC company):
Date	Acc Titles	Debit $	Credit $	Calculation:
Oct 1 2018	Investment in Bonds of PHA	400000
	Cash		400000
April 1 2019	Cash	9636970
	Discount on Bonds Payable	363030
	Bonds Payable		10000000
Aug 1 2019	Investment in LCD	16100000		(200000*80 + 100000)
	Cash		16100000
Sep 30 2019	Interest expense	385478.8		(9636970*4%)
	Discount on Bonds Payable		85478.8
	Cash		300000
Sep 30 2019	Interest receivable	40000		(400000*10%)
	Interest revenue		40000
Sep 30 2019	FV Adjustment on LCD shares	800000		(200000 * (84-80))
	Unrealised income		800000