6

On December 31, 2016, Nodd Corp. acquired an investment in GT Ltd. bonds with a nominal interest rate of 10% (received each December 31), and the controller produced the following bond amortization schedule based on an effective rate of approximately 15%. The bonds mature on December 31, 2019. The company prepares financial statements each December 31 following IFRS and has adopted the provisions of IFRS 9. Management is in the process of determining whether to hold these bonds for their future cash flows in order to repay debt that is also maturing at the end of 2019, or whether they will hold them for trading purposes.

	Dec. 31, 2016	Dec. 31, 2017	Dec. 31, 2018	Dec. 31, 2019
Amortized cost of GT Ltd. bonds	$487,214	$505,296	$526,090	$550,000
Fair value at each year end	487,214	499,000	523,000	550,000

Instructions

(Round amounts to the nearest dollar.)

(a)

Assume that management determines these bonds will be held until the end of 2019, with the proceeds being used to retire maturing debt. Prepare all journal entries required at December 31, 2016, 2017, 2018, and 2019, including the recognition of interest income and the bonds' ultimate redemption.

(b)

Assume that management determines the investment in the bonds is speculative in nature and will be held for trading purposes. Prepare all journal entries required at December 31, 2016, 2017, 2018, and 2019, including the receipt of interest each year and the bonds' ultimate redemption, if Nodd continues to hold the GT Ltd. bonds until maturity. Nodd will not recognize interest separately from other investment income.

P9-7

On January 1, 2017, Novotna Company purchased $400,000 worth of 8% bonds of Aguirre Co. for $369,114. The bonds were purchased to yield 10% interest. Interest is payable semi-annually, on July 1 and January 1. The bonds mature on January 1, 2022. Novotna Company uses the effective interest method to amortize the discount or premium. On January 1, 2019, to meet its liquidity needs, Novotna Company sold the bonds for $370,726, after receiving interest.

Instructions

(a)

Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as FV-OCI.

(b)

Prepare the amortization schedule for the bonds.

(c)

Prepare the journal entries to record the semi-annual interest on July 1, 2017, and December 31, 2017.

(d)

Assuming the fair value of Aguirre bonds is $372,726 on December 31, 2018, prepare the necessary adjusting entry. (Assume that the fair value adjustment balance on January 1, 2018, is a debit of $3,375.)

(e)

Prepare the journal entry to record the sale of the bonds on January 1, 2019.