Question

Journal Entry By December 31, 2017, Pina Colada Corp. had performed a significant amount of environmental...

Journal Entry

By December 31, 2017, Pina Colada Corp. had performed a significant amount of environmental consulting services for Blossom Company. Blossom Company was short of cash, and Pina Colada Corp. agreed to accept a $187,500, non–interest-bearing note due December 31, 2019, as payment in full. Blossom Company is a bit of a credit risk and typically borrows funds at a rate of 15%. Pina Colada Corp. is much more creditworthy and has various lines of credit at 8%. Pina Colada Corp. reports under IFRS. The tables in this problem are to be used as a reference for this problem.

A) Prepare the journal entry to record the transaction on December 31, 2017, for Pina Colada Corp.

Account Titles and Explanation

Debit

Credit

B) Assuming Pina Colada Corp.’s fiscal year end is December 31, prepare the journal entry required at December 31, 2018

Account Titles and Explanation

Debit

Credit

C)Assuming Pina Colada Corp.’s fiscal year end is December 31, prepare the journal entry required at December 31, 2019.

Account Titles and Explanation

Debit

Credit

Record Interest

Account Titles and Explanation

Debit

Credit

To record Notes

D)

What are the amount and classification of the note on Pina Colada Corp.’s statement of financial position as at December 31, 2018? (Round answer to 0 decimal places, e.g. 58,971.)

The balance of the note at December 31, 2018 $

The note would be classified as a / an _____________

(current asset, non-current asset, current liability, non-current liability, equity

on the statement of financial position.

E) Assume instead that Pina Colada Corp. reports under ASPE and uses the straight-line method to amortize the discount on the note. What would the interest income be relating to the note for 2018 and 2019? (Round answer to 0 decimal places, e.g. 58,971.)

Interest income for 2018 $__________

Interest Income for 2019 $ ____________

0 0
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Answer #1

The key issue here is the discounting rate that should be used to arrive at the present value of the bonds issued by Blossom Company.

Fair value generally means the price that a willing market participant would be ready to pay for acquiring the asset or discharge of liability.

In the given case, as the bonds are issued by Blossom company, in case Pina Colada goes to the market to sell the interest free bonds, the market participant would use the risk profile of the issuer, i.e. Blossom Company to measure the bonds. Therefore, the interest rate applicable to Blossom Company would be used to discount the bonds to present value.

Journal entries

For section A

(assuming revenue is recorded at the time of providing the services and a receivable of USD 187,500 is outstanding in the books of accounts)

Journal on 31 December 2017

Particulars

Dr/Cr

Amount

Computation

Notes

Dr

141,776

(187500/1.15^3)

Revenue

Dr

45,723

187500-amount of notes computed above

Trade receivables

Cr

-187,500

Total value of trade receivable surrendered

Considering that this is a change in payment terms of the contract, any adjustment arising in the value of the consideration would be made against revenue. The notes are recorded at fair value, the total amount of receivables existing in the books of accounts will be zeroed. Net adjustment of this vaue will be made in revenue as an adjustment to the contract price. Net revenue recorded will 187,500, assumed to be already recorded at the time of providing the services less 45,723, adjustment made on year end.

For section B (entry on 31 December 2018)

Particulars

Dr/Cr

Amount

Computation

Notes

Dr

21,226

(141,776*15%)

Finance Income

Cr

-21,226

Entry passed for unwinding of interest on notes. Interest recognised at 15%. Closing balance of Notes USD (141,776+21,226)=163,043

For section C (entry as on 31 December 2019)

Particulars

Dr/Cr

Amount

Computation

Notes

Dr

24,457

(163,043*15%)

Finance Income

Cr

-24,457

Cash/Bank

Dr

187,500

Notes

Cr

187,500

Entry passed for unwinding of interest on notes. Interest recognised at 15% of previous closing balance of notes. Closing balance of Notes USD (163,043+24,457)=187,500

Second entry is passed to record redemption of notes.

Section D

Balance of notes as on 31 December 2018 is USD 163,043.

This will be classified as a current asset in the statement of financial position as this is due for redemption within 12 months of the date of statement of financial position.

Section E

In case the entity uses ASPE, the interest would be straightlined over 2 years. The total interest element is 45,723. The amount therefore recognised as interest income in 2018 and 2019 would be USD 22,861 each (45,723/2)

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