Good Investment Ltd (GIL)’s financial year ends on 31 December. GIL had the foll

Question

Good Investment Ltd (GIL)’s financial year ends on 31 December. GIL had the following financial instruments at 31 December 2015:

1. GIL issued a corporate bond for cash at par for $10 million on 1 July 2015. The bond term is five years and it paid an annual interest of 3% in arrears. The market interest rate of a similar corporate bond is 5% per annum. Interest is payable annually on 1 January. Ignore transaction cost.

2. On 30 September 2015, GIL bought 200,000 shares of Small Romeo Ltd (SRL) at a cost of $800,000. The transaction costs incurred amounted to $700. GIL intended to hold these shares for long-term strategic purposes. The market price of the shares was $5 per share as at 31 December 2015. The company’s policy is to present gains or losses arising from long term strategic investment in other comprehensive income.

Prepare journal entries to record the above transactions for GIL for the year ended 31 December 2015. Show your workings clearly to the nearest dollar. (Hint: you should recognize interest expense at financial year end.)

Explanation / Answer

1. dt. 7.1.15 -Issue of Bond for 10 Million

Bank Dr 10,000,000

5 year 3% Bond Cr 10,000,000

2. dt. 31.12.15 - Interest expenses recongnition on accrual basis

Interest expenses Dr 150,000

Interest Payable Cr 150,000

(Being interest for 6 month recognised)

3. 9.30.2015 - purchase of shares in Small romeo Ltd

Investment A/c Dr 800,700

Bank/Cash Cr 800,700

4. 12.31.15 - Revaluation investment to recognise gain

Investment A/c Dr 199,300

Other comphrehsive income Cr 199,300

(working - 200,000 shares x 5 - (800,700)

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