On January 1, 2012, Mamood Ltd. paid $322,744.44 for 12% bonds of Variation Ltd. with a maturity value of$300,000. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2012, mature on January 1, 2018, and pay interest each December 31. Mamood acquired the bond investment as part of its portfolio of trading securities. It accounts for the bonds at FV-NI and reports interest income separately from other investment gains and losses. At December 31, 2012, Mamood’s year end, the bonds had a fair value of$320,700. Mamood applies IFRS.
During 2013, the economic outlook related to Variation Ltd.'s primary business took a major downturn, so that Variation’s debt was downgraded. By the end of 2013, the bonds were priced at 85.5, and at December 31, 2014, they were selling in the market at 87. Conditions reversed in 2015 and the outlook for Variation Ltd. significantly improved, leaving their bonds with a fair value at December 31, 2015, of 99.5.
Instructions
(a) Prepare the entries to record Mamood's purchase of the bonds on January 1, 2012, the recognition of interest income and interest received on December 31, 2012, and the fair value adjustment required at December 31, 2012.
(b) Prepare all entries required for 2013, including recognition of the impairment in value if necessary, and for 2014.
(c) Prepare all entries required for 2015, including recognition of the recovery of the impairment in value, if necessary.
(d) Identify the impairment loss model applied in this situation. If Mamood had accounted for this investment at amortized cost, identify and briefly describe the impairment model the company would have used if Mamood applied
(1) IFRS using IAS 39
(2) IFRS using IFRS 9
(3) ASPE.