ADVANCED DIPLOMA IN BUSINESS STUDIES (ACCOUNTING) YEAR II ABFA5014 FINANCIAL REPORTING AND CURRENT ISSUES

TUTORIAL 9
FINANCIAL INSTRUMENTS

1)

Wonderland Bhd entered into the following transactions during the year ended 31 December 2009: a) Entered into a speculative interest rate option costing RM10,000 on 1 January 2009 to borrow RM6,000,000 from AC Bank commencing 31 March 2011 for 6 months at 4%. The value of the option at 31 December 2009 was RM15,250. Purchased 6% debentures in FCO Bhd on 1 January 2009 ( the issue date ) for RM150,000 as an investment. Wonderland Bhd intends to hold the debentures until their redemption at a premium in 5 year's time. The effective rate of interest of the debentures is 8.0%. Purchased 50,000 shares in STC Bhd on 1 July 2009 for RM3.50 each as an investment. The share price on 31 December 2009 was RM3.75.

b)

c)

Required: Show the accounting treatment and relevant extracts from the financial statements for the year ended 31 December 2009. Wonderland Bhd only designates financial assets as at fair value through profit or loss where this is unavoidable.

2)

On 1.1.x4, XYZ issued RM10 million 5% convertible loan notes maturing on 1.1.x7. The holder has the option to either accept cash or convert the holdings into ordinary shares. The term of conversion is RM100 of loan note can be converted into 40 ordinary shares at the end of the loan term which is 1.1.x7. At the date of the issue, the market interest rate on non-convertible loans was 10%. Required: In the books of XYZ: a) Show journal entries to record the issue of the financial instruments; b) Extract of the income statement and statement of financial position for years x4 to x6; c) Journal entries on 1.1.x7, assuming 30% of the holders of the financial instrument chose to accept cash.

1 of 2

ABFA5014 FINANCIAL REPORTING AND CURRENT ISSUES

Tutorial 7

3)

On 1.1.x3, Robin issued RM20 million zero coupon interest rate loan notes maturing on 1.1.x8. These loan notes are redeemable at a premium of 50%. At the time of the issue of the debt, the market interest rate was 8.5%. Required: In the books of Robin: a) Extract of the income statement and statement of financial position for years x3 to x7. b) Journal entries on 1.1.x8 to record the derecognition of the liability.

4)

MU Bhd issues a perpetual debt instrument on which it pays an interest of 20% for the first 10 years and zero interest after that. Discuss the accounting treatment.

5)

On 1 December x3, Jack Enterprise has a number of finished pieces of jewellery which are valued at cost of RM8.0 million. These goods have selling value of RM10.12 million. The precious metal gold content was 400,000 grams. The selling price of the jewellery is determined substantially by the price of gold. Cost of the finished jewellery is the gold cost plus 5% for labour and conversion costs. The selling price is normally the spot rate of gold content plus 10%. The management was worried about a potential decline in the price of gold and its effect on selling price of the inventory. Therefore, it sold futures contract for 400,000 grams of gold at RM24 a gram at 1 December x3. The contracts mature on 30 November x4. The management designated the futures contracts as cash flow hedge of the anticipated sale of the jewellery. Historically, this has proved to be highly effective in offsetting any changes in the selling price of the jewellery. The finished jewellery was sold for RM22.8 per gram on 30 November x4.The cost of setting the futures contracts in place were negligible. Gold's spot and futures prices were as follows: Spot price RM per gram RM 23 21 Futures price per gram for delivery 30 November x4 RM 24 21

1 December x3 30 November x4

Required: Calculate and discuss whether the cash flow hedge of the sale of the inventory of jewellery is effective and how it should be accounted for in the financial statements of Jack Enterprise for the year ended 30 November x4.

2 of 2