Question: On December 31, 2016, Nodd Corp. acquired
On December 31, 2016, Nodd Corp. acquired an investment in GT Ltd. bonds with a nominal interest rate of 10% (received each December 31), and the controller produced the following bond amortization schedule based on an effective rate of approximately 15%. The bonds mature on December 31, 2019. The company prepares financial statements each December 31 following IFRS and has adopted the provisions of IFRS 9. Management is in the process of determining whether to hold these bonds for their future cash flows in order to repay debt that is also maturing at the end of 2019, or whether they will hold them for trading purposes.
Instructions:
(a) Assume that management determines these bonds will be held until the end of 2019, with the proceeds being used to retire maturing debt. Prepare all journal entries required at December 31, 2016, 2017, 2018, and 2019, including the recognition of interest income and the bonds’ ultimate redemption.
(b) Assume that management determines the investment in the bonds is speculative in nature and will be held for trading purposes. Prepare all journal entries required at December 31, 2016, 2017, 2018, and 2019, including the receipt of interest each year and the bonds’ ultimate redemption, if Nodd continues to hold the GT Ltd. bonds until maturity. Nodd will not recognize interest separately from other investment income.
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Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2018 Dec. 31, 2019 $487,214 487,214 $505,296 499,000 $526,090 523,000 $550,000 550,000 Amortized cost of GT Ltd. bonds Fair value at each year end
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