Question

On 1 January 2020, ABC bought a USD 150,000 5% bond for USD 145,000, incurring issue costs of USD 2,000. Interest is received in arrears. The bond will be redeemed at USD 151,059 on 31 December 2022. The effective rate of interest is 7%.

The fair value of the bond was as follows:

• 31/12/20 USD 160,000
• 31/12/21 USD 154,000

Required:

Pass Journal Entries and provide extracts of Financial Statements, with calculations for how the bond will have been accounted for if:

a)       ABC planned to hold the bond until the redemption date. (10 marks)

b)      ABC planned to trade the bond in the short­term, selling it for its fair value on 1 January 2021. (5 marks)

Answer 1

Bonds:

Bonds are the financial instruments issued by the company in order to raise funds from outside and it can also be traded.

Requirement a: ABC planned to hold the bond until the redemption date.

Date	Balance	Interest expense	Receipt	Carrying Balance
		7%	150,000*5%
31/12/2020	147000	10290	7500	149790
31/12/2021	149790	11983.2	7500	154273.2
31/12/2022	154273.2	12341.856	7500	159115.056

	Particulars	Debit	Credit
31-12-2020	Interest expense A/cDr	10290
	To Cash A/c		10290
31-12-2021	Interest expense A/cDr	11983.2
	To Cash A/c		11983.2
31-12-2022	Interest expense A/cDr	12341.85
	To Cash A/c		12341.85

On 31/12/2020 bonds will be recorded for $149790 in financial statement.

On 31/12/20221 bonds will be recorded for $1,54,273 in financial statement.

Requirement b: ABC planned to trade the bond in the short ­term, selling it for its fair value :

Balance	Interest expense	Receipt	Carrying Balance	Fair Value	Gain
	7%	150,000*5%
147000	10290	7500	149790	1,60,000	10,210
149790	11983.2	7500	154273.2	1,54,000	-273
154273.2	12341.856	7500	159115.056

Date	Particulars	Debit	Credit
01-01-2021	Bonds A/C Dr	10,210
	To Gain on revaluation		10,210
	(Being increase in the value of bonds recorded)

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