CH8 - q2

EXERCISE 8–2 On January 1, 2020, Smythe Corp. invested in a 10-year, $25,000 face value 4% bond, paying $25,523 in cash. Interest is paid annually, every January 1. On January 3, 2028, Smythe sold all of the bonds for 101. Smythe's year-end is December 31 and the company follows IFRS. At the time of purchase, Smythe intended to collect the contractual cash flows of interest and principle, and to hold the bonds to maturity. Required: a. What is the effective interest rate for this bond, rounded to the nearest whole dollar? (Hint: this involves a net present value calculation as discussed in Chapter  6 : Cash and Receivables.) b. What is the amount of the bond premium or discount? Indicate if it is a premium or a discount. c. Record all relevant entries for 2020, the January entry for 2021, and the entry for the sale in 2028, if Smythe classifies the investment as an AC investment. Round amounts to the nearest whole dollar. d. What is the total interest income and net cash flows for Smythe over the life of the bond? What accounts for the difference between these two amounts? e. Assume now that Smythe follows ASPE. How would the entries in part (c) differ? Use numbers to support your answer. EXERCISE 8–2 a. Using a business calculator present value functions, solve for interest I/Y when the present value, payment, number of periods and future values are given: PV = (PMT, I/Y, N, FV) +/- 25,523PV = 1000 PMT, unknown I/Y, 10 N, 25000 FV = 3.745% (rounded) b.   Face value of the bond  $25,000 Present value of the bond   25,523 Bond premium  $ 523 c. Journal entries for a AC investment using amortized cost:

General Journal Date Account/Explanation F Debit Credit Jan 1 2020 Investment in bonds – at amortized cost Investment in bonds – at amortized cost     25,523     Cash Cash       25,523         Dec 31 2020 Interest receivable Interest receivable     1,000     Investment in bonds – at amortized cost Investment in bonds – at amortized cost       44   Interest income Interest income       956   For Investment in bonds: ( 1,000−(25,523×3.75% ))               Jan 1 2021 Cash Cash     1,000     Interest receivable Interest receivable       1,000         Jan 1 2028 Cash Cash     25,250     Investment in bonds – at amortized cost (see schedule below or alternative PC calculation) Investment in bonds – at amortized cost (see schedule below or alternative PC calculation)       25,121   Gain on sale of investment Gain on sale of investment       129   For Cash: ( $25,000×101 )