An Indian entity, whose functional currency is rupees, purchases USD dominated bond at its fair value of USD 1,000. The bond carries stated interest…

CA Final · Financial Reporting · MTP · May 2024
An Indian entity, whose functional currency is rupees, purchases USD dominated bond at its fair value of USD 1,000. The bond carries stated interest @ 4.7% p.a. on its face value. The said interest is received at the year end. The bond has maturity period of 5 years and is redeemable at its face value of USD 1,250. The fair value of the bond at the end of year 1 is USD 1,060. The exchange rate on the date of transaction and at the end of year 1 are USD 1 = 40 and USD 1 = 45, respectively. The weighted average exchange rate for the year is 1 USD = 42. The entity has determined that it is holding the bond as part of an investment portfolio whose objective is met both by holding the asset to collect contractual cash flows and selling the asset. The purchased USD bond is to be classified under the FVTOCI category. The bond results in effective interest rate (EIR) of 10% p.a. Calculate gain or loss to be recognised in Profit & Loss and Other Comprehensive Income for year 1. Also pass journal entry to recognise gain or loss on above. (Round off the figures to nearest rupees)

Suggested Answer and Working Notes:

Computation of amounts to be recognized in the P&L and OCI: Particulars USD Exchange rate ₹ Cost of the bond 1,000 40 40,000 Interest accrued @ 10% p.a. 100 42 4,200 Interest received (USD 1,250 x 4.7%) (59) 45 (2,655) Amortized cost at year-end 1,041 45 46,845 Fair value at year end 1,060 45 47,700 Interest income to be recognized in P & L 4,200 Exchange gain on the principal amount [1,000 x (45-40)] 5,000 Exchange gain on interest accrual [100 x (45 - 42)] 300 Total exchange gain/loss to be recognized in P&L 5,300 Fair value gain to be recognized in OCI [45 x (1,060 - 1,041)] 855 Journal entry to recognize gain/loss Bond (₹ 47,700 - 40,000) Dr. 7,700 Bank (Interest received) Dr. 2,655 To Interest Income (P & L) 4,200 To Exchange gain (P & L) 5,300 To OCI (fair value gain) 855

Topics: Ind AS 21, Ind AS 12

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