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Homework answers / question archive / Financial instruments- 2 On 1 January 2020, Entity A (functional currency: Euro) buys a US government bond for $1000
Financial instruments- 2
On 1 January 2020, Entity A (functional currency: Euro) buys a US government bond for $1000. The bond has a nominal value of $1000 and pays a fixed interest of 2% (payable 30 December). We assume the credit risk on the bond is zero. Entity A classifies the loan as fair value through other comprehensive income.
On 1 January 2020, the exchange rate is $1 = €1,20. On 31 December 2020, the exchange rate is $1 = €1,10. The average exchange rate is $1 = €1,18.
On 31 December 2020, the fair value of the bond is $1100.
Required: the amounts recognized by A over 2020 in connection with the bond in profit or loss and other comprehensive income, in the form of journal entries. Explain your answer.
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