Tea Tree Ltd has acquired some government bonds on 1 July 2018. The government bonds will generate contractual cash flows that are solely principal and interest. The cash flows comprise: l a return of the principal amount of $2 000 000 in five years time; and l payments of interest of $200 000 at the end of each of the next five years.

The government bonds were acquired at a price that will generate an effective interest rate of 6 per cent. That is, they were sold when the market required a rate of return of 6 per cent on government bonds with these cash flow characteristics. The required market rates of return for these government bonds decreased to 5 per cent on 30 June 2019 (which caused the fair value of the bonds to rise). Tax implications will be ignored for the purposes of answering this question

REQUIRED

(a) Determine the initial purchase price of the government bonds on 1 July 2018. (b) Provide the accounting journal entries for the government bonds for the years ending 30 June 2019 and 30 June 2020 assuming that the business model being used for the asset focuses upon collecting the contractual cash flows. (c) Provide the accounting entries for the government bonds for the year ending 30 June 2019 assuming that the business model being used has the objective of both collecting the contractual cash flows from the government bonds as well as selling government bonds. (d) Provide the accounting entries for the government bonds for the year ending 30 June 2019 assuming that the business model being used for government bonds focuses upon trading government bonds.