Question 7.2 (Total: 22 marks; 2 marks per line)

On October 1, 4M Ltd. purchased a 7% bond with a face value of $1,000 for trading purposes, accounting for the investment at fair value through net income. The bond was priced at 1.023 to yield 4M 5%, and pays interest annually each October 1. 4M has a December 31 year-end, and at this date, the bonds fair value was $1,050. Assume 4M applies IFRS and follows a policy of not reporting interest income separately from investment income.

Required

1. Prepare 4Ms entry for the purchase of the investment.

2. Prepare 4Ms entry for the December 31 interest accrual.

3. Prepare 4Ms entry for the year-end fair value adjustment.

4. Assume 4M applied ASPE, uses the effective-interest method, and follows a policy of reporting interest income separately.