On January 1, 2018, Mamood Ltd. paid $322,744.44 for 12% bonds of Variation Ltd. with a maturity value of $300,000. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2018, mature on January 1, 2023, and pay interest each December 31. Mamood acquired the bond investment as part of its portfolio of trading securities and it accounts for the bonds at FV-NI, following IFRS. At December 31, 2018, Mamood’s year end, the bonds had a fair value of $320,700.

During 2019, the economic outlook related to Variation Ltd.’s primary business took a major downturn, so that Variation’s debt was downgraded. By the end of 2019, the bonds were priced at 85.5, and at December 31, 2020, they were selling in the market at 87. Conditions reversed in 2021 and the outlook for Variation Ltd. significantly improved, leaving its bonds with a fair value of 99.5 at December 31, 2021.

Instructions

a. Prepare a bond amortization table for the four-year period ended December 31, 2021. Round amounts to the nearest cent.

b. Prepare the entries to record Mamood’s purchase of the bonds on January 1, 2018, the recognition of interest income and interest received on December 31, 2018, and the fair value adjustment required at December 31, 2018.

c. Prepare all entries required for 2019, including recognition of the impairment in value if necessary, and for 2020.

d. Prepare all entries required for 2021, including recognition of the recovery of the impairment in value, if necessary.

e. Digging Deeper Identify the impairment loss model applied in this situation. If Mamood had accounted for this investment at amortized cost, identify and briefly describe the impairment model the company would have used if Mamood applied IFRS, or ASPE.