CH8 - q5

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University of Alberta *

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351

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Finance

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Apr 3, 2024

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EXERCISE 8–5 On March 1, Imperial Mark Co. purchased 5% bonds with a face value of $20,000 for trading purposes. The bonds were priced in the trading markets at 101 to yield 4.87%, at the time of the purchase, and pay interest annually each July 1. At year-end on December 31, the bonds had a fair value of $21,000. Imperial Mark follows IFRS. Required: a. What classification would Imperial Mark use to report this investment? b. Prepare the journal entries for the bond purchase, the first interest payment, and any year-end adjusting entries required. Round amounts to the nearest whole dollar. c. Assume now that Imperial Mark follows ASPE. How would Imperial Mark classify and report this investment? Prepare the journal entries from part (b) using the ASPE classification and the alternate method to amortize the premium. Assume that bond investment matures in ten years. EXERCISE 8–5 a. Imperial Mark will classify this investment as an investment in bonds – FVNI and will report the investment as a current asset. b. Investment purchase: General Journal Date Account/Explanation F Debit Credit Mar 1 Investment in bonds – FVNI Investment in bonds – FVNI 20,200 Interest receivable Interest receivable 667 Cash Cash 20,867 For Investment in bonds: ( 20,000×101 ), for Interest receivable: ( (20,000×5%)×8÷12 ), for Cash: ( 20,000×101 ) + unearned interest from July 1 to Feb 28 c. Payment of interest using the effective interest rate (IFRS):

General Journal Date Account/Explanation F Debit Credit Jul 1 Cash Cash 1,000 Investment in bonds – FVNI Investment in bonds – FVNI 5 Interest income Interest income 328 Interest receivable Interest receivable 667 For Cash: ( 20,000×5% ), For Interest income: ( 20,200×4.87%×4÷12 ) d. Interest accrual using the effective interest rate (IFRS): General Journal Date Account/Explanation F Debit Credit Dec 31 Interest receivable Interest receivable 500 Investment in bonds – FVNI Investment in bonds – FVNI 8 Interest income Interest income 492 For Interest receivable: ( 20,000×5%×6÷12 ), for Interest income: ( (20,200−5)×4.87%×6÷12 ) e. Fair value adjustment at year-end: General Journal Date Account/Explanation F Debit Credit Dec 31 Investment in bonds – FVNI Investment in bonds – FVNI 813

Unrealized holding gain in FVNI bonds Unrealized holding gain in FVNI bonds 813 For Investment in bonds: ( 21,000−(20,200−5−8) ) f. If Imperial Mark follows ASPE, it would classify the investment in bonds as Short-Term Trading Investments, FVNI, and report it as a current investment since management intends to sell it. The alternate method to amortize the premium is using straight-line method. The premium to amortize is the face value minus the investment cost over the life of the bond or (20,000−20,200)=200÷112 months=1.79 per month . The interest income at year-end would be the investment amount at the face rate of interest minus the premium amortized using SL for that reporting period. Investment purchase: General Journal Date Account/Explanation F Debit Credit Mar 1 Investment in bonds – FVNI Investment in bonds – FVNI 20,200 Interest receivable Interest receivable 667 Cash Cash 20,867 For Investment in bonds: ( 20,000×101 ), for Interest receivable: ( (20,000×5%)×8÷12 ), for Cash: ( 20,000×101 ) + unearned interest from July 1 to Feb 28 Interest payment using straight-line amortization of premium: General Journal Date Account/Explanation F Debit Credit Jul 1 Cash Cash 1,000 Investment in bonds – FVNI 7

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Investment in bonds – FVNI Interest income Interest income 326 Interest receivable Interest receivable 667 For Cash: ( 20,000×5% ), for Investment in bonds: ( $1.79×4 months ), for Interest income: ( (20,000×5%)−7−667 ) Interest accrual using straight-line method (ASPE): General Journal Date Account/Explanation F Debit Credit Dec 31 Interest receivable Interest receivable 500 Investment in bonds – FVNI Investment in bonds – FVNI 11 Interest income Interest income 489 For Interest receivable: ( 20,000×5%×6÷12 ), for Investment in bonds: ( $1.79×6 months ), for Interest income: ( 500−11 ) Fair value adjustment at year-end: General Journal Date Account/Explanation F Debit Credit Dec 31 Investment in bonds – FVNI Investment in bonds – FVNI 818 Unrealized holding gain in FVNI bonds Unrealized holding gain in FVNI bonds 818 ( 21,000−(20,200−7−11) )