Problem 4 On December 31, 20x0, the Smith Corporation purchased bonds of another

Question

Problem 4

On December 31, 20x0, the Smith Corporation purchased bonds of another company. The bonds had a face value of $1,000,000, mature on December 31, 20x13, and pay a coupon rate of 3.6% semi-annually on June 30 and Dec 31. The bonds were yielding 3% on the date of purchase. Smith paid $7,300 in transaction costs.

On December 31, 20x1, the bonds are trading at 102.

On January 2, 20x2, the bonds are sold at 102.2 less $8,000 in transaction costs.

Required –

Prepare all journal entries for December 31, 20x0 through January 2, 20x2 on the assumption that the securities are classified as…

a. Amortized Cost

b. FVTOCI

Explanation / Answer

Bonds at Amortised Cost Date Journal Entry Amount Amount 31/12/2010 Investment in Bonds 1,000,000 To Bank 1,000,000 (Being Bonds Purchased) 30/06/2011 Bonds                36,000 To Interest                  36,000 (Being Interest due) Interest                36,000 To Cash                  36,000 (Being Interest received) 31/12/2011 Bonds                36,000 To Interest                  36,000 (Being Interest due) Interest                36,000 To Cash                  36,000 (Being Interest received) 2/01/2012 Bank 1,022,000 To Bonds 1,022,000 (Being Bonds Sold) Bonds at FVTOCI Date Journal Entry Amount Amount 31/12/2010 Investment in Bonds 1,000,000 Transation Cost                  7,300 To Bank 1,007,300 (Being Bonds Purchased) 30/06/2011 Bonds                36,000 To Interest                  36,000 (Being Interest due) Interest                36,000 To Cash                  36,000 (Being Interest received) 31/12/2011 Bonds                36,000 To Interest                  36,000 (Being Interest due) Interest                36,000 To Cash                  36,000 (Being Interest received) Bonds                20,000 To Fair Value Gain                  20,000 (Being Gain recognsied) Fair Value Gain                20,000 To OCI                  20,000 (Being gain transferd to OCI A/c) OCI                20,000 To Fair Value Reserve                  20,000 (Being Balance of OCI A/c transferred to next year) 2/01/2012 Bank 1,014,000 To Transaction Cost                     8,000 To Bonds 1,022,000 (Being Bonds Sold) Gain on Sale                  2,000 To OCI                     2,000 (Being Gain on sale of Bonds recognsied)

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