Company X purchased $2 million face value of bonds issued by company Y on 2 January 2013 at purchase cost of $1.94 million. The bond had coupon of 5% payable annually, and matures on 31 December 2014. Company J bond was rated at investment grade by credit rating agencies on 2 January 2015.

In the year 2013, company X discovered a fraud by a senior manager that caused a significant loss. Company X share prices declined significantly and bond credit spreads widened. Its business was expected to worsen that could potentially threaten its solvency. The credit rating agencies downgraded the rating of company Y bonds to junk status on 31 December 2013. Company X expects no interest to be made for 2013 and 2014, and 20% of the principal to be recovered. The bond market value was $360,000 on 31 December 2013. Eventually company Y paid $345,000 on the principal and defaulted on the interest.

Required
Determine the expected credit losses on 31 December 2013 recorded in company X’s book.
Prepare company X’s journal entries from 2 January 2013 to 31 December 2014, in accordance with IFRS 9 based on both business models:

(a) The bond was held to collect contractual cash flows;

(b) The bond was held to collect contractual cash flows and for sale.