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Determine the effective interest rate

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Question - On January 1, Year 1, Jekyll Enterprises Inc., a publicly accountable entity, paid $2,080,589 to acquire $2,000,000 in bonds of Hyde Technologies Inc. that mature in three years. The face value of the bonds is $2,000,000, and the bonds pay interest semi-annually at 8% per annum on June 30 and December 31.

Assume that the fair value of the bonds was as set out below:

Date Market value

December 31, Year 1 $2,070,000

December 31, Year 2 2,050,000

December 31, Year 3 2,000,000

Required - Determine the effective interest rate and prepare the journal entries to record interest earned on this investment throughout the term of the bonds and the requisite fair value adjustments as at December 31, Year 1, December 31, Year 2, and December 31, Year 3, assuming that the bonds are classified as:

a) Amortized cost

b) FVOCI

Reference no: EM133143987

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