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On 1 January 2017, Company A purchased a bond with fair value of $9,478,763 by cash. Company A also needed to pay transaction costs of $100,000 to the bond issuer on 6 January 2017. The face value was $10,000,000. The bond interest was 5% in arrears and was to be redeemed at face value in 5 years’ time. The effective interest rate was 6%. The 12 month expected credit loss is estimated as $100,000. (at amortised cost)
On 31 December 2017, the interest income was collected at its due date. There is no significant change in credit risk. The 12 month expected credit loss is estimated as $180,000.
On 31 December 2018, Company A estimated that no further interest will be received and that only 50% of the redemption value will be repaid on 31 Dec 2019.
1 Jan 2017
Dr. Financial asset $9,578,763
Cr. Bank $9,478,763
Cr. Payables $100,000
Dr. Impairment loss (P/L) $100,000
Cr. Loss Allowance $100,0006 Jan 2017
Dr. Payables $100,000
Cr. Loss allowance $100,00031 Dec 2017
Dr. Bank $500,000
Dr. Financial Asset $74,726
Cr. Interest Income $574,726
Dr. Impairment loss (P/L) $80,000
Cr. Loss Allowance $80,00031 Dec 2018
Dr Bank 14,157
Cr interest income 14,157
Dr impairment loss(P/L) 586,777
Cr loss allowance 586,777Working
Present value of future cash flows 250,000/1.06 =235,849500,000-235,849=264151 (expected loss)
235949 x 0.06 = 14,157 (interest income)
Is my approach correct? Please give me suggestions. Thank you.
Yes … but you appear to have ignored the last point in the question “only 50% of the redemption value will be repaid on 31 Dec 2019”
and your 31 December 2018 journal appears incorrect – we didn’t receive any interest so how come your debit entry is to the bank?
In addition, you appear to have missed tis point “On 31 December 2018, Company A estimated that no further interest will be received”
But you are substantially correct
OK?
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