to sell the instrument. Entity B invest in a CU10 mio bond of Entity P. The bond is traded on a stock exchange. The terms of the loan require repayment of CU 10 million by entity P in 3 years. The interest rate on the loan is 7% on CU 10 million payable in arrears at the anniversary date of the lending. Entity B. Entity F intends to sell the asset as soon as the market value of the instrument is above its investment. Entity P lends CU10 mio to Entity B. The terms of the loan require repayment of CU 10 million by entity P in 3 years. The interest rate on the loan is 7% on CU 10 million payable in arrears at the anniversary date of the lending. 6
Part 7: Chapter 1 – Introduction to financial instruments 2. Determine for the following contracts whether they should be treated as a financial liability or an equity instrument. a. Company A issues 100,000 €1 convertible notes. The notes pay interest at 7%. The market rate for similar debt without the conversion option is 9%. The note is redeemable, but it converts at the option of the holder into however many shares that will have a value of exactly €100,000 (Alfredson e.a., pg 242, Problem 6.1). b. Company A issues 100,000 €1 convertible notes. The notes pay interest at 5%. They convert at any time at the option of the holder into 100,000 ordinary shares. The notes are redeemable at the option of the holder for cash after 5 years. Market rates for similar notes without the conversion option are 7% (Alfredson e.a., pg 243 Problem 6.2). c. A perpetual instrument is issued at a par amount of CU100 million requiring coupon payments of 6% to be made annually. A CCOUNTING FOR FINANCIAL ASSETS 3. On 1 January 20X0, an entity acquires a bond for consideration of CU 90,000 incurring transaction costs of CU5,000. Interest of CU4,000 p.a. is receivable over the next 5 years (31 December 20X0 to 31 December 20X4). The bond has a mandatory redemption of CU110,000 on 31 December 20X4. The fair value of the bond is as follows: FV (CU) 31/12/20X0 90,000 31/12/20X1 96,000 31/12/20X2 99,000 31/12/20X3 108,000 31/12/20X4 110,000 Give the appropriate entries for this bond 1. if it is not sold during its life and measured at amortised cost; 2. if it is measured at fair value through other comprehensive income and sold on 31/12/20X3 at its fair value; and 3. if it is measured at fair value through profit or loss and sold on 31/12/20X3 at its fair value. 4. Nabuko ltd acquires 10 shares of Aida plc for CU250 per share on 1 January 20X8. At the end of the accounting period these shares are worth CU270. Aida announced a dividend of CU0,01 per share. Give the appropriate entries for the investment if it is measured a. At fair value through profit or loss b. At fair value through other comprehensive income 7
Part 7: Chapter 1 – Introduction to financial instruments 5. On 1 January 20X8 Butterfly acquires a bond with nominal value of CU100,000 and nominal interest rate of 6% for CU110,000. The interest is payable over the next 5 years. Acquisition costs are CU500 . The bond is listed and has a fair value of CU112,000 at the end of 20X8.
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