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Founded a decade ago, Folk Company is engaged in the manufacturing of musical instruments. Because...

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Accounting

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Founded a decade ago, Folk Company is engaged in the manufacturing of musical instruments. Because of a large amount of cash balances accumulated in the recent years, the management has consulted the finance manager's (Robinson) opinion of effectively utilize the surplus cash. Based on the Robinson's advice, Folk Company purchased a 6-year bond with the face value of $300,000 at $272,368 on 1 January 2022. The coupon interest rate of the bond was 5% and the effective interest rate was 7%. The above mentioned bond investment is held under the business model whose objective is to hold financial assets in order to collect contractual cash flows and the contractual cash flow characteristics test has been fulfilled. On 31 December 2022, after the interest had been paid, the bond issuer encountered solvency problem. Accordingly, Folk Company evaluated that the bond was credit impaired. In addition, the company estimated that no interest will be recoverable and only $110,000 can be recovered on the bond's maturity date. Required: (17 marks) Prepare the journal entries relating to the above mentioned bond investment on the following dates: (a) 1 January 2022 (b) 31 December 2022

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