Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

On 1 January 2017, Company ABC issued bonds with a nominal value of 3 million DOLLARS for redemption at a premium on 31 December 2021.

On 1 January 2017, Company ABC issued bonds with a nominal value of 3 million DOLLARS for redemption at a premium on 31 December 2021. The notional interest rate of the bonds is 4% with an effective interest rate of 7%. Aces business model objective for managing instrument is to collect contractual cash flows and the instrument has basic loan features of principal and interest cash flows.

Company ABC reports on a yearly basis. On 1 September 2019, its business model objective for the investment changes to managing the instrument for fair value changes rather than collecting contractual cash flows.

The market price of the bonds in years 2017 to 2021 is shown below:

USD

31 December 2017

3 million

31 December 2018

3.2 million

31 December 2019

3.48 million

31 December 2020

3.45 million

31 December 2021

3.69 million

Required:

  1. Prepare an amortisation schedule to show the carrying amount of the instrument under the amortised cost model.
  2. When the business model is changed on 1 September 2019, explain how Company ABC shall apply the reclassification standard of IFRS 9.
  3. Show the journal entries in the books of Company ABC for the years 2017, 2020 and 2021.
  4. Show extracts of the Statement of Profit or Loss for the years ended 31 December 2017 and 2020.
  5. Assume that the bonds eventually default at the end of year 2020 and the actual loss amounts to USD 1 million. Under IFRS 9, if on initial recognition the bond has a low credit risk, 12-month expected credit losses are recognized. At the end of the year 2017, there has been no significant deterioration in the credit quality, or the bonds are still considered to be of low credit risk. The probability of default within the next 12-month period is 1% and consistent throughout the five-year period. Explain how to account for this situation in the books of Company ABC in the year 2017.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Value Added Auditing CERM Academy Series On Enterprise Risk Management

Authors: Greg Hutchins

4th Edition

978-0965466554

More Books

Students also viewed these Accounting questions

Question

What are the role of supervisors ?

Answered: 1 week ago