2020 march

q1 d
Hummings Co’s business model is to collect the contractual cash flows over the life of the asset.
So the bonds should be measured at amortized cost. The value of the bond should be the fair
value(10m) at the date of acquisition. At 31 December 20X3, the bonds were considered to be low
risk and as a result the 12-month expected credit losses are expected to be $10,000. So the bonds
should be classified as a stage one financial asset at 31.12.23. the expected credit losses should be
expensed and the carrying amount of the bonds is 9.99m
31.12.23 interest coupon 31.12.24
10000 800 (500) 10300
On 31 December 20X4, Stave Co paid the coupon interest, however, at that date the risks
associated with the bonds were deemed to have increased significantly. But there is no objective
evidence of impairment exists at the reporting date. So the bond should be classified as stage two.
The expected credit losses that result from all possible default events over the expected life of the
financial instrument. The lifetime expected credit losses should be recognized.
pv of losses
20x5 3%*462963=13889
20x6 5%*6858710=342936
total 13889+342936=356825
the loss of bonds in 20x4 should be expensed with 346825(356825-10000). It should be deducted
from interest income and the carrying amount of bonds in 20x4 is 9943175(10300000-356825).