Question

Question 6: Amortized Cost and FV-NI Investments in Bonds

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.

4

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.

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:

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

Answer:

   Journal entries Including december 31 adjusting entries  

Date	particulars	Debit ($)	Credit ($)
Feb 01	Bond investment at amortised cost dr Interest receivable dr ($324000*10%)4/12 To cash	324000 10800	334800
April 01	Cash dr To interest receivable ($324000*10%)6/12	16200	16200
June 15	Bond investment at amortised cost dr Interest receivable dr ($ 216000*9%)*5/12 To cash	216000 810	216810
August 31	Cash dr ($65000*99%) Investment income dr To interest receivable ($65000*10%)*5/12 To bond investment at amortised cost	64350 3358	2708 65000
October 01	Cash dr To investment income ($324000-$65000)*10%*6/12	12950	12950
December 01	Cash dr   To interest receivable To investment income   ($216000*9%)*5/12	9720	810 8910
December 31	Interest receivable dr To investment income ($259000*10%)*3/12+($216000*9%)*1/12	8095	8095

December 31   

Gibbons bonds ($ 259000 *98.5%): $255115

Sampson bonds ($216000*101%): $218160