Question

On December 31, 2013, Nodd Corp. acquired an investment in GT Ltd. bonds with a nominal interest rate of I 0% (received each December 31) and the controller produced the following bond amortization schedule based on an effective rate of approximately 15%. The bonds mature on December 31, 2016. The company prepares financial statements each December 31 following IFRS and has adopted the provisions of IFRS 9. Management is in the process of determining whether to hold these bonds for their future cash flows in order to repay debt that is also maturing at the end of 2016, or whether they will hold them for trading purposes.
Instructions (Round amounts to the nearest dollar.)
(a) Assume that management determines these bonds will be held until the end of 2016 with the proceeds being used to retire maturing debt. Prepare all journal entries required at December 31, 2013, 2014, 2015, and 2016, including the recognition of interest income and the bonds' ultimate redemption.
(b) Assume that management determines the investment in the bonds is speculative in nature and will be held for trading purposes. If Nodd continues to hold the GT Ltd. bonds until maturity, prepare all journal entries required at December 31, 2013, 2014, 2015, and 2016, including the receipt of interest each year and the bonds' ultimate redemption. N odd will not recognize interest separately from other investment income.
(c) Instead of the situation and fair values described above, now assume that GT Ltd. experienced financial difficulties during 2015, and in late December 2015 informed Nodd that it expected to be able to pay only half the contracted 2016 interest in one year's time. In addition, GT asked Nodd to agree to a 550,000 reduction in the principal amount owed. The full interest for 2015 was paid on time. The market reacted to this news by downgrading the bonds' fair value immediately to $487,800 at December 31, 2015. Prepare the entries required under the measurement method used in part (a) at December 31, 2015, and at December 31, 2016, acknowledging this impairment and that GT's reduced payments of principal and interest were made as indicated.
(d) Using the information about impairment in part (c), prepare the entries required under the measurement method used in part (b) at December 31, 2015, and at December 31, 2016, acknowledging this impairment and that GT's reduced payments of principal and interest were made as indicated.
(e) Assume that Nodd Corp. is a private corporation that applies ASPE, and you are the company's controller. What method of accounting are you most likely to use in accounting for the investment in the GT bonds? Explain briefly. Under the method you identify, would you expect the impairment and subsequent entries to be the same as those in (c) or in (d)? If not, explain what would be required in the case of impairment.


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  • CreatedSeptember 18, 2015
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