Page 87 - F2 Integrated Workbook STUDENT 2019
P. 87
Financial instruments
Example 3.11
On 1 January 20X1, Tokyo bought a $100,000 5% bond for $95,000, incurring
acquisition costs of $2,000. Interest is received annually 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 December 20X1 $110,000
31 December 20X2 $104,000
Explain, with calculations, how the bond will have been accounted for
over all relevant years if:
(a) Tokyo planned to hold the bond until the redemption date.
(b) Tokyo may sell the bond if the possibility of an investment with a
higher return arises.
(c) Tokyo planned to trade the bond in the short-term, selling it for its
fair value on 1 January 20X2.
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