On January 1, 2020, Smythe Corp. invested in a 10-year, $25,000 face value 4% bond, paying $25,523 in cash. Interest is paid annually, every January 1. On January 3, 2028, Smythe sold all of the bonds for 101. Smythe’s year-end is December 31 and the company follows IFRS. At the time of purchase, Smythe intended to collect the contractual cash flows of interest and principle, and to hold the bonds to maturity.

Required:

a. What is the effective interest rate for this bond, rounded to the nearest whole dollar?

(Hint: this involves a net present value calculation as discussed in Chapter 6: Cash and Receivables.)

b. What is the amount of the bond premium or discount? Indicate if it is a premium or a discount.

c. Record all relevant entries for 2020, the January entry for 2021, and the entry for the sale in 2028, if Smythe classifies the investment as an AC investment. Round amounts to the nearest whole dollar.

d. What is the total interest income and net cash flows for Smythe over the life of the bond? What accounts for the difference between these two amounts?

e. Assume now that Smythe follows ASPE. How would the entries in part

(c) differ?

Use numbers to support your answer.