Sunset Safaris was able to accumulate a generous profit over the years and is as- sessing...

  

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Sunset Safaris was able to accumulate a generous profit over the years and is as- sessing how to best utilise these profits. Due to volatility in the markets, the manage- ment of Sunset Safaris has decided to invest the profits in government bonds. The entity purchased 50 000, 7% bonds on 1 January 2021 from the government at a fair value of R51 000 000. The face value of the bonds is R50 000 000. The contractual terms of the bonds state that coupon payments are made annually in arrears on 31 December and that the bonds are redeemable at the face value on 31 December 2025. Transaction costs of R25 000 were incurred when obtaining the bonds. The fair value of the bonds was R51 500 000 on 31 December 2021. The business model of Sunset Safaris is to hold the government bonds to collect the contractual cash flows. However, if Sunset Safaris sees that government bonds are becoming an unattractive investment due to declining interest rates in the economy in the next two to four years, then Sunset Safaris will sell the bonds in order to make a profit on the sale of the bonds. The Financial Accountant of Sunset Safaris was unsure how to account for the above transactions. REQUIRED: 3.1) Advise the Financial Accountant, in terms of IFRS 9 (Financial Instruments), how he should classify the investment in the government bonds. (5 marks) 3.2) Prepare the general journal entries necessary to account for the government bonds in the records of Sunset Safaris for the financial year ended 31 December 2021. Show all workings. Dates and narrations are not required. Ignore taxation. Sunset Safaris was able to accumulate a generous profit over the years and is as- sessing how to best utilise these profits. Due to volatility in the markets, the manage- ment of Sunset Safaris has decided to invest the profits in government bonds. The entity purchased 50 000, 7% bonds on 1 January 2021 from the government at a fair value of R51 000 000. The face value of the bonds is R50 000 000. The contractual terms of the bonds state that coupon payments are made annually in arrears on 31 December and that the bonds are redeemable at the face value on 31 December 2025. Transaction costs of R25 000 were incurred when obtaining the bonds. The fair value of the bonds was R51 500 000 on 31 December 2021. The business model of Sunset Safaris is to hold the government bonds to collect the contractual cash flows. However, if Sunset Safaris sees that government bonds are becoming an unattractive investment due to declining interest rates in the economy in the next two to four years, then Sunset Safaris will sell the bonds in order to make a profit on the sale of the bonds. The Financial Accountant of Sunset Safaris was unsure how to account for the above transactions. REQUIRED: 3.1) Advise the Financial Accountant, in terms of IFRS 9 (Financial Instruments), how he should classify the investment in the government bonds. (5 marks) 3.2) Prepare the general journal entries necessary to account for the government bonds in the records of Sunset Safaris for the financial year ended 31 December 2021. Show all workings. Dates and narrations are not required. Ignore taxation.

Answer rating: 100% (QA)

Solution 31 The investment in government bonds should be classified as a financial asset under IFRS 9 specifically as a heldtocollect financial asset ... View the full answer