Question

Grouper Company, a public company following IFRS purchased $130,000, 4% five-year bonds of IAA Corporation on January 1, 2021. Interest is payable on July 1 and January 1. The bond is selling at a $135,995 resulting in a bond premium of $5,995. The effective interest rate is 3%. At the year-end of December 31, the fair value of the investment was $131,800.

Prepare the appropriate journal entries for the year ending December 31, 2021 assuming that Grouper Company uses FV-OCI. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to 0 decimal palces, e.g. 5,125.)

Date Account Titles and Explanation Debit Credit (Purchase the bond) (Receipt of interest) (Accrue interest and amortization (effective interest method) at year end) (Remeasurement to fair value at year end)

Answer 1

On 1st January 2021,

Investment in IAA Corporation Bonds Debit 135995

Bank account Credit 135995

On July 1, 2021,

Bank account Debit 2600

Interest on bonds Credit 2600

On 31st December 2021,

Accrued interest Debit 2600

Interest on bonds Credit 2600

Other Comprehensive Income Debit 4195

Investment in IAA Corporation Bonds Credit 4195

Please note that the bond markets are very volatile and so practically it is prudent to charge to other comprehensive income the premium paid on purchase of bonds in the year of purchase. There is too much of interest rate volatility in the bond market and so amortising the premium over years will not reveal the correct picture. Better to charge the premium paid to other comprehensive income in year of purchase.