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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.
Expert Solution
Value of Bond will be caclulted as per the average exchange rate during the year.
Euro Value of the bond on December 31, 2020 = $1,100*1.18 = 1,298
| Date | Particular | Debit | Credit |
| 1-Jan | Bond Account Debit | € 1,200.00 | |
| To cash Account | € 1,200.00 | ||
| 31-Dec | Cash Account Debit | € 22.00 | |
| To Interest income | € 22.00 | ||
| 31-Dec | Bond Account Debit | € 98.00 | |
| To Profit and Loss account | € 98.00 |
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