(notional principal of €10 million, 3 year term, variable interest rate, Euribor –linked, reset annually) match those of the loan. Under the swap Bottom pays interest at a fixed rate of 7% and receives interest at a rate equivalent to Euribor. Annual swap receipts and payments – and end-year fair values of the swap contract – in the 3 years are set out below (currency amounts are in euros). Date Euribor Floating rate receipt Fixed rate payment Net receipt (payment) Fair value of swap A/(L) 1 Jan 20X1 7% Nil 31 Dex 20X1 6.5% 650,000 700,000 (50,000) (90,400) 31 Dec 20X2 7.15% 715,000 700,000 15,000 14,025 31 Dec 20X3 6.75% 675,000 700,000 (25,000) 0 Give the loan and swap-related accounting entries if Bottom does not apply hedge accounting. E XAMPLES OF EXAM QUESTIONS 1. The 1 st of January 20X1, TRUE buys 5 shares of FALSE at a price of CU100 per share. TRUE elects to present the changes in the fair value of the shares other comprehensive income. The fair value of the shares in the subsequent years is as follows. Date Fair value 1/1/20X1 100 31/12/20X1 120 31/12/20X2 98 31/12/20X3 95 The 31 st of December 20X3 TRUE sells the shares of FALSE at their fair value. Give the accounting entries in relation to this transaction from 1 January 20X1 to 31 December 20X4 (Exam June 2016). 2. ISSUER issues on 1 January 20X1 a bond with a nominal value of CU1,000, a nominal interest rate of 3% and a duration of 5 years. Interest is payable at the end of each year. The market rate for similar instruments is 2%. a. Determine the market value of the bond at 1 January 20X1 (Exam June 2016) b. Give the amortization table for this bond (2pt) Tip: If you were not able to answer part a. of this question you are allowed to make an estimate of the market value of the bond at 1/1/20X1. Explain your reasoning in that case. c. At 31 December 20X4, ISSUER buys the bonds back from the investors at CU1,000. Give the accounting entries in the books of Issuer in relation to this transaction from 1 January 20X1 to 31 December 20X4 if ISSUER classifies the instrument as at fair value through profit or loss (6pt). 9
Part 7: Chapter 1 – Introduction to financial instruments 10
Part 7: Chapter 1 – Introduction to financial instruments S OLUTIONS E XERCISES AND CASES 1. Assume that the entity does not classify any financial instrument at inception as at fair value through profit or loss and does not classify equity instruments at inception as at fair value through other comprehensive income. Classify the following financial instruments in the financial statements of entity Bas a. Measured at amortised cost b. Measured at fair value through OCI c. Measured at fair value through P&L Instrument Classification Entity B sells goods to customers on credit. Entity B typically offers customers up to 60 days following the delivery of goods to make payment in full. Entity B collects the cash in accordance with the contractual cash flows of the trade receivables and has no intention to dispose of the receivables Financial asset at amortised cost Entity B invested in 1 share of entity C. This share gives B no control or significant influence in entity C.
- Summer '17
- K B
- Balance Sheet, Generally Accepted Accounting Principles, SOFP