Financial assets

Thank you

After going through for the second time, I still cant understand. I will post the question and answer given here for you to have look.

QUESTION,
On 1 January 20×1, Tokyo bought a $100,000 5% bond for $95,000 incurring issue costs of $2,000. Interest is received in arrears. The bond will be redeemed at a premium of $5,960 over nominal value on 31 December 20X3. The effective rate of interest is 8%.

The fair value of the bond was as follows:
31/12/X1 $110,000
31/12/X2 $104,000

Required:
Explain, with calculations, how the bond will have been accounted for over all relevant years if:

(i) Tokyo’s business model is to trade bonds in the short-term.
Assume that Tokyo sold this bond for its fair value on 1 January 20X2.

ANSWER,
The bond would be classified as fair value through profit or loss.

The asset is initially recognised at its fair value of $95,000. The transaction costs of $2,000 would be expensed to profit or loss.

In the year ended 31/12/X1, interest income of $5,000 ($100,000 * 5%) would be recognised in profit or loss. The asset would be revalued to $110,000 with a gain of $15,000 ($110,000 – $95,000) recognised in profit or loss.

On 1/1/X2, the cash proceeds of $110,000 would be recognised and the financial asset would be derecognised.

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My question is why did they recognise the bonds at its fair value of $95 000 instead of the nominal value of $100 000 (which is what they bought)?

Hmmm, I understand the answer given to dr financial asset $95 000 cr Cash $95 000 is logical, and it would be “illogical” to dr financial asset $100 000 cr $95 000, as it will not balance. But what is the reason behind it to dr financial asset $95 000 and not $100 000

Also, since the financial asset is measured at FVTPL, why cant we just Dr Financial asset $15 000 cr profit or loss $15 000, to account for any changes in fair value ($110 000 minus $95 000)? What is the purpose of calculating the interest income of $5000 ($100 000 * 5%)?

The interest income used is the nominal interest rate instead of the effective interest rate of 8%

We always use the effective interest rate to calculate the interest income to be charged to the profit or loss (eg in amortised cost and FVTOCI), but in this question they are using the 5% nominal interest rate, and not the 8% effective rate of interest. I dont understand

Ok 🙂 Will keep that in mind. I posted the whole question because it is very difficult for me to explain my confusion without giving you to see the question

1. Why cant we only just, DR Financial Asset $15 000 CR Profit or Loss $15 000 by comparing the FV at the beginning of the year and FV at the end of the year?

2. Do we need to include and calculate the interest income also for financial asset measured at FVTPL?