Entity A is a listed company in Hong Kong for more than 20 years. Its business mainly
Question:
Entity A is a listed company in Hong Kong for more than 20 years. Its business mainly focuses on the food industry.
On 1 January 2016, Entity A invested in a bond with a face value of $7,350,000 and it pays a fixed interest of 6.00% for the first two years, then 9.25% fixed interest for the last two years. The fair value of the bond is $7,650,000 and the transaction cost for purchasing the bond is $59,456. Entity A made the payment to the issuer for the purchase of the bond by a cheque. The bond was planned to hold until maturity. The fair value option in measurement was not adopted. Interest is paid in arrears annually. The bond will be redeemed at a premium of 35% after 4 years. The effective rate for this bond is 13.00%. The 12-month expected credit loss and lifetime expected credit loss was initially estimated at $20,250 and $61,500 respectively.
On 31 December 2016, there was no significant change in credit risk. The 12-month expected credit loss and lifetime expected credit loss was estimated at $19,860 and $55,000 respectively.
On 31 December 2017, it became apparent that the issuer suffered financial difficulties. After communicating with the issuer, it was estimated that Entity A will only receive expected contractual cash flows of 60% fixed interests and 75% redemption value in the future. The bond has become credit-impaired.
On 31 December 2018 and 31 December 2019, there was NO further deterioration in credit risk. The expected contractual cash flows of fixed interests and redemption value in the Year 2018 and Year 2019 were well received from the issuer on time. Entity A believed that no further credit loss would be applied in these 2 years.
The end of the reporting period is 31 December.
REQUIRED:
According to relevant accounting standards, prepare journal entries to recognise the transactions of Entity A from 1 January 2016 to 31 December 2019.
ACCOUNTS FOR INPUT:
| Financial asset (Amortised Cost) | Financial asset (FVTPL) | Financial asset (FVTOCI) |
| Financial liability | Equity instrument | Transaction cost | Bank | Loss allowance | Impairment loss | Reversal of impairment loss |
| Gain on remeasurement (P/L) | Loss on remeasurement (P/L) | Gain on remeasurement (OCI) | Loss on remeasurement (OCI) |
| Payable | Receivable | Other income | Other expense | Reclassification (P/L) | Reclassification (OCI) |
| Interest expense | Interest revenue | Loss on disposal | Gain on disposal | Retained earnings | No entry |
Please follow the accounts names provided and use the boxes.
ANSWERS:
Journal Entries:
| Date | Account Name | Debit ($) | Credit ($) | Hints For Sequence |
| 1-Jan-16 | - | |||
| - | ||||
| 1-Jan-16 | - | |||
| Judge Dr/Cr. Only Enter Amount. | ||||
| - | ||||
| 31-Dec-16 | - | |||
| An Asset. Judge Dr/Cr. Only Enter Amount. | ||||
| - | ||||
| 31-Dec-16 | - | |||
| Judge Dr/Cr. Only Enter Amount. | ||||
| - | ||||
| 31-Dec-17 | - | |||
| Judge Dr/Cr. Only Enter Amount. | ||||
| Not an Asset. | ||||
| 31-Dec-17 | - | |||
| Judge Dr/Cr. Only Enter Amount. | ||||
| An Asset. Judge Dr/Cr. Only Enter Amount. | ||||
| - | ||||
| 31-Dec-18 | - | |||
| Judge Dr/Cr. Only Enter Amount. | ||||
| Not an Asset. | ||||
| 31-Dec-18 | - | |||
| - | ||||
| 31-Dec-19 | - | |||
| An Asset. Judge Dr/Cr. Only Enter Amount. | ||||
| - | ||||
| 31-Dec-19 | - | |||
| Judge Dr/Cr. Only Enter Amount. | ||||
| - | ||||
