QUESTION $3$

Entity A has been a listed company in Hong Kong for more than $20$ years. Its main business focuses on electronic toys and products. Its performance has

been very good in previous years.

On $15$ December $2019,$ Entity A kept a large amount of cash in the bank so the senior management decided to invest in different financial instruments. It

planned to invest in $2$ financial assets, i$.$e$.$ FA$1$ and FA$2.$

On $1$ January $2020,$ Entity A invested in FA$1.$ Its face value is $$5,000,000$ and pays a fixed interest of $8\mathrm{.}89\%$ for the first two years, then $1\mathrm{.}50\%$ fixed interest

for the last two years. The fair value of FA$1$ is $$5,228,430$ and the transaction cost for purchasing FA$1$ is $$48,285.$ The payment made to the issuer was

transferred by a local bank on the same day. It was planned to hold until maturity. The fair value option in measurement was not adopted. Interest was paid

in arrears annually. FA$1$ will be redeemed at a premium of $25\%$ after $4$ years. The effective interest rate for FA$1$ was $9\mathrm{.}25\%.$ The $12-$month expected credit

loss and lifetime expected credit loss were initially estimated at $$9,680$ and $$12,690$ respectively.

On $15$ March $2020,$ Entity A invested in FA$2,$ i$.$e$.42,000$ units at $$6\mathrm{.}25$ each. It intended to sell FA$2$ in the short term which was held for trading purposes.

The issue cost on the purchase amounted to $$1,250.$

On $31$ December $2020,$ FA$2$ were worth $$7\mathrm{.}88$ each. There was no significant change in credit risk. The $12-$month expected credit loss and lifetime expected

credit loss were estimated at $$8,860$ and $$10,200$ respectively.

On $15$ October $2021,$ FA$2$ were worth $$7\mathrm{.}34$ each. A quarter of the FA$2$ was sold at $$82,500.$ The senior management decided to hold the remaining FA$2$ not

for the short term and accepted the irrevocable election.

In late December $2021,$ the financial news of a local newspaper disclosed that the issuer of FA$1$ suffered financial difficulties. On $31$ December $2021,$ after

communicating with the issuer, it was estimated that Entity A would only receive expected contractual cash flows of $60\%$ fixed interests and $80\%$ redemption

value of FA$1$ in the future. FA$1$ has become credit$-$impaired.

For FA$1,$ on $31$ December $2022$ and $31$ December $2023,$ there was NO further deterioration in credit risk. The expected contractual cash flows of fixed

interests and redemption value in the Years $2022$ and $2023$ were well received from the issuer on time. Entity A believed that no further credit loss would be

applied in these $2$ years.

For FA$2,$ it was worth $$8\mathrm{.}35,$ $$9\mathrm{.}45$ and $$8\mathrm{.}95$ per unit on $31$ December $2021,31$ December $2022$ and $31$ December $2023$ respectively.

The end of the reporting period is $31$ December.

REQUIRED:

According to relevant accounting standards, prepare journal entries to recognise the transactions of Entity A from $1$ January $2020$ to $31$ December $2023.$

ACCOUNTS FOR INPUT:

$|$ Financial asset $($Amortised Cost$)|$ Financial asset $($FVTPL$)|$ Financial asset $($FVTOCI$)|$

$|$ Financial liability $|$ Equity instrument $|$ Transaction cost $|$ Bank $|$ Loss allowance $|$ Impairment loss $|$ Reversal of impairment loss $|$

$|$ Gain on remeasurement $(\frac{P}{L})|$ Loss on remeasurement $(\frac{P}{L})|$ Gain on remeasurement $(OCl)|$ Loss on remeasurement $(OCl)|$

$|$ Payable $|$ Receivable $|$ Other income $|$ Other expense $|$ Reclassification $($P$/$L$)|$ Reclassification $($OCl$)|$

$|$ Interest expense $|$ Interest revenue $|$ Loss on disposal $|$ Gain on disposal $|$ Retained earnings $|$ No entry $|$

ANSWERS:

Journal Entries: