ACC208: Intermediate Financial Accounting

DEF Limited ("DEF"), adopts the Singapore FRSs and has 31 December financial year ends. It issues a bond with a face value of $200,000 on 1 January 20x1 for $254,956 in cash. It has no intention of transferring the bond to another party. It has a coupon rate of 9% and matures in 5 years. The implicit effective interest rate is 3%. This bond is traded on the Singapore Exchange.

At the end of December 20x3, after paying the 9% coupon payment for the year, the entity faced severe cash flow issues and negotiated to restructure the bond. On 1 January 20x4, an agreement was reached with the counterparties to restructure the bonds to reduce the coupon payments to 2.5% instead of 9% and extend the maturity by another year to 31 December 20x6. In other words, the three revised coupon payments will each happen at the end of 31 December 20x4, 31 December 20x5 and 31 December 20x6. All other terms and features of the bond remain the same. As a result of this restructuring, the price of the bond has fallen to 98.

In presenting your answers, where percentages are used, round your answers to the nearest one decimal place and for others, round your answers to the nearest dollar.

Required:

(a) Apply FRS 109 Financial Instruments and discuss how the bond and transactions related to the bond should be classified, recognised and measured in DEF's books for the financial year ending 31 December 20x1. Show all workings in your answers.(10 marks)

(b) Apply FRS 109 Financial Instruments and discuss how the modified bond should be accounted for in DEF's books for the financial year ending 31 December 20x4. Show all workings in your answers and clearly state the adjustments to the accounts and whether any gains or losses are to be recognised, where applicable.(19 marks)