AC2101 S1 20132014 Seminar 10 Outline Appendix...

AC2101 S1 20132014 Seminar 10 Outline Appendix (Students)(1)
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1 Nanyang Technological University Nanyang Business School AC2101 – Accounting Recognition and Measurement Semester 1, 2013-14 Appendix to Outline for Seminar 10: The required reading, NCKL FRS 39, provides additional illustrations to the following scenarios: Appendix C Problem 1 – Relatively similar to the issues in AA201 AY 2009/2010 Semester 2 Exam Question 1 - Investment in DEF shares - Investment in LMN bonds - Investment in XYZ shares Appendix C Problem 2 – Relatively similar to the issues in AA201 AY 2010/2011 Semester 1 Exam Question 1 - Investment in Bravo Ltd’s bonds Self-Study Questions on Financial Assets Problem 1: On 1 July 2010, NBS Ltd acquired the bonds of SMU Ltd, with a face value of $1,000,000, at a cost of $1,044,518. SMU Ltd issued $100,000,000 bonds at par on 1 July 2010, with a coupon rate of 5% per annum payable on 30 June each year. The bonds mature on 30 June 2015. It may be determined that the effective interest rate implicit in the bond investment is 4%. NBS Ltd classifies this investment as an “available-for-sale” investment under FRS 39. NBS Ltd adopts a 30 June financial year-end. On 30 June 2011, SMU Ltd announced the cancellation of several major projects by its customers. Consequently, SMU Ltd would cut its bond coupon rate to 2% from 30 June 2012 onwards and extend its bond maturity and coupon payment at the new rate to 30 June 2016. It is determined that the new effective interest rate implicit in SMU Ltd bonds after the announced change in its bond terms is 3%. SMU Ltd went on to make the stated coupon and principal payments duly and fully. Assume that NBS Ltd and SMU Ltd are both audited by a Big 4 Audit Firm. Required (a) State NBS Ltd’s impairment loss arising from its investment in SMU Ltd bonds for its financial year ended 30 June 2011 (to the nearest dollar). (b) State NBS Ltd’s effective interest income from its investment in SMU Ltd bonds for the financial years ended 30 June 2011, 2012 and 2013 (to the nearest dollar).
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2 Proposed Solutions: (a) Per FRS39:68, impairment (cumulative) loss = Acquisition cost (net of any principal repayment & amortization) – current fair value Net acquisition cost = 1,044,518 – 1st year premium amortization [50,000 - (0.04 * 1,044,518)] = 1,044,518 – [50,000 - 41,781] = 1,044,518 – 8,219 = 1,036,299 Current value = PV(ordinary annuity of 20,000 for n = 5 & i = 3%) + PV(principal of 1,000,000 for n = 5 & i = 3%) = 954,203 Cumulative loss = 1,036,299 - 954,203 = 82,096 (b) Effective interest income for 2011 = 0.04 * 1,044,518 = 41,781 Effective interest income for 2012 = 0.03 * 954,203 = 28,626
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