Questions:
At the end of the year 2022, Party A sells $1,000,000 worth of corporate bonds to Party B with an agreement to repurchase them later. The agreed repurchase price is $1,020,000 after one year.

Party A receives $1,000,000 in cash from Party B in exchange for the corporate bonds. Party A pays interest to Party B for the use of funds.

In December 2023, a year after that, Party A repurchases the corporate bonds from Party B for $1,020,000. Party B returns the corporate bonds to Party A.

What is the impact of these transactions in income statements and balance sheets of both Party A in 2022 and 2023?

What about Party B?

Reference answers:
# Party A’s Financial Statements for the year 2022:

1. Impact on Income Statement: 

The selling of corporate bonds would have no impact on the Income Statement of Party A as it would not generate any revenue from sales of goods or services. It is just a transaction of financial instruments. 

2. Impact on Balance Sheet: 

Due to selling corporate bonds of worth $1,000,000, Party A would record an increase of $1,000,000 in its Assets. This increase would be reflected in Cash and Cash Equivalents. A corresponding repurchase agreement liability of $1000000 will need to be recognized. 

# Party A’s Financial Statements for the year 2023:

1. Impact on Income Statement: 

The interest expense of $20,000 would be recorded in the Income Statement of Party A under the heading of Finance Cost or Interest Expense. This increase in Interest Expense would ultimately result in decrease of Net Profit of Party A for the year. 

2. Impact on Balance Sheet: 

Due to repurchasing corporate bonds of worth $1,020,000, Party A would record a decrease of $1,020,000 in its Cash and Cash Equivalents. Also, the decrease of $20,000 in Net Profit figure would also be reflected in Retained Earnings in the Equity section of balance sheet i.e. Retained Earnings would decrease by $20,000. As the cash has been repaid, the repurchase liability will have to be unrecognized. This will result in a decrease in the liabilities of $1000000.

# Party B’s Financial Statements for the year 2022:

1. Impact on Income Statement: 

The buying of corporate bonds would have no impact on the Income Statement of Party B as it would not generate any revenue from sales of goods or services or any expenses from purchasing those bonds. 

2. Impact on Balance Sheet: 

Due to the purchase of corporate bonds of worth $1,000,000, Party B would record a decrease of $1,000,000 in its Cash and Cash Equivalents and an increase of similar amount in Short-Term Investment. 

# Party B’s Financial Statements for the year 2023:

1. Impact on Income Statement: 

The interest income of $20,000 would be recorded in the Income Statement of Party B under the heading of Finance Income or Interest Income. This increase in Interest Expense would ultimately result in increase of Net Profit of Party B for the year. 

2. Impact on Balance Sheet: 

Due to reselling corporate bonds, Party B would record a decrease of $1,000,000 in its Short-Term Investment balance and an increase of $1,020,000 in Cash and Cash Equivalents. Also, the increase of $20,000 in Net Profit figure would also be reflected in Retained Earnings in the Equity section of balance sheet i.e. Retained Earnings would increase by $20,000.