On 1 July 2014, 3A Ltd purchased an investment 5-year bonds with a face value of $500 000 and a coupon rate of 8 per cent, paid every 30 June (assume…

On 1 July 2014, 3A Ltd purchased an investment 5-year bonds with a face value of $500 000 and a coupon rate of 8 per cent, paid every 30 June (assume there were no transaction costs associated with the acquisition). The bonds will generate contractual cash flows that are solely principal and interest. At the time, the market interest rate is 11 per cent so the bonds were purchased for $444 586. 3A Ltd operates within a business model where bonds are held in order to collect contractual cash flows and there is no intention to trade them. On 30 June 2015, the market interest rate for these bonds decreased by 3%. Ignore any tax implications when answering the following questions.

REQUIRED:

1) What would be an appropriate measurement basis for the bonds purchased by 3A Ltd? Explain.

2) Calculate the interest revenue & the carrying amount of the bonds on 30 June 2015 (round to nearest dollar).

3) Provide all journal entries for the year ending 30 June 2015.

4) Provide all journal entries for the year ending 30 June 2015, assuming that the business model being used by 3A Ltd has the objective of both collecting the contractual cash flows from the bonds as well as selling bonds.

5) Provide all journal entries for the year ending 30 June 2015, assuming that the business model being used by 3A Ltd has the objective of trading bonds. 

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