Company K purchased $1 million face value of bonds issued by company J on 1 July 2015 at purchase cost of $1.05 million. The bond had coupon of 6% payable semi-annually and matures on 30 June 2017. Company J bond was rated at investment grade by credit rating agencies on 1 July 2015.

On 31 December 2015, company J paid its bond coupon and there is no significant change in its credit condition. Company K estimates the probability of default in the interest payments of subsequent year 2016 to be 5%. Market price of bond on 31 December 2015 was $1.03 million.

In 2016, company J lost a major customer and the economic environment deteriorated with significant loss of business orders. As a result, company J reported a huge loss in the year 2016. The credit spreads of the company J bonds traded in the market widened significantly in response to the increase in credit risk of company J. The credit rating agencies lowered the rating of company J bond by two notches, but still within investment grade. Company J paid the 30 June 2016 interest payments in full. On 31 December 2016, company K estimates the probability of default in the principal payment to be 20%. Market price of bond on 31 December 2016 was $830,000. Eventually company J paid the remaining interest and principal in full.

Required
Determine the expected credit losses on 31 December 2015 and 31 December 2016 recorded in company K’s book.
Prepare company K’s journal entries from 1 July 2015 to 30 June 2017, in accordance with IFRS 9 based on both business models:

(a) The bond was held to collect contractual cash flows;

(b) The bond was held to collect contractual cash flows and for sale.