Question

P9.3 The following amortization schedule is for Flagg Ltd.'s investment in Spangler Corp.'s $100,000, five-year bonds with a 7% interest rate and a 5% yield, which were purchased on December 31, 2019, for $108,660:

		Cash Received		Interest Income		Bond Premium Amortized		Amortized Cost of Bonds
Dec. 31, 2019								$108,660
Dec. 31, 2020		$7,000		$5,433		$1,567		107,093
Dec. 31, 2021		7,000		5,354		1,646		105,447
Dec. 31, 2022		7,000		5,272		1,728		103,719
Dec. 31, 2023		7,000		5,186		1,814		101,905
Dec. 31, 2024		7,000		5,095		1,905		100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year end:

		Dec. 31, 2020		Dec. 31, 2021		Dec. 31, 2022		Dec. 31, 2023		Dec. 31, 2024
Amortized cost		$107,093		$105,447		$103,719		$101,905		$100,000
Fair value		$106,500		$107,500		$105,650		$103,000		$100,000

Assume that Flagg Ltd. follows IFRS and reports interest income separately from other investment income.

Instructions

a. Prepare the journal entry to record the purchase of these bonds on December 31, 2019, assuming the bonds are accounted for using the amortized cost model.

b. Prepare the journal entry(ies) related to the bonds accounted for using the amortized cost model for 2020.

c. Prepare the journal entry(ies) related to the bonds accounted for using the amortized cost model for 2022.

Answer 1