To establish liability and equity component find

To establish liability and equity component.
Find Present Value (PV) of redeemable value $,000
$6 m x 0.735 4,410
Find PV of interest payments
$6 m x 6% = $360,000 x (CDF for 4 years @ 8%)
$360,000 x 3.312 1,192
Liability element 5,602
Sales proceeds 6,000
Equity element ($6m - $5.602m) 398
The result of the 6% convertible bonds is that the gearing will increase by $5.602 million
and equity will increase by only $398,000. The overall affect will be an increase in our
gearing levels.

403
B9-25
Answer is D - $2,690,000
$’000
Net proceeds ($6m - $120,000) 5,880
Total payable
Interest payments ($6m x 3.5% x 7 yrs) 1,470
Redemption value ($6m + $1.1m) 7,100
8,570
Total finance cost (8,570 – 5,880) 2,690
Answer is D - $2,690,000
B9-26
Initial acquisition journals:
$’000
Debit Financial assets held for trading (SOFP) 51
Credit Bank (SOFP) 51
Subsequent re-measurement journals:
$’000
Debit Financial assets held for trading (SOFP) 1.5
Credit Gain or loss (income statement) 1.5
Initial recognition – 11/02/20X5
60,000 shares x $0.85 = $51,000
Dr Financial assets held for trading $51,000
Cr Bank $51,000
Subsequent measurement – 31/03/20X5
Increase in value at 31/03/X5 is $0.875 - $0.85 = $0.025
Total increase – 60,000 shares x $0.025 = $1,500
Dr Financial assets held for trading $1,500
Cr Gain (income statement) $1,500

404
Revision – IAS 39 Financial instruments
Financial assets held for trading
These are financial assets that have been acquired with a view to selling them in the short
term. These include derivatives (unless they are hedging instruments). An example
would be buying shares to use up surplus cash, with view to selling in a few months time.
Initial recognition
The financial asset or financial liability must initially be recognised at FAIR VALUE less
direct transaction costs.
Fair value can be derived from:
(i) Quoted prices
(ii) Where there is no active market, then use valuation techniques with references
to market conditions, eg discounted cash flows using market discount factor.
(iii) If none of the above 2 is possible, then fair value is cost less any impairment.
Subsequent measurement is at fair value with the gains and losses taken to the income
statement at each re-measurement.
B9-27
Answer $21,200
Revision
To establish liability and equity component.
1 Find Present Value (PV) of redeemable value
2 Find PV of interest payments
3 Deduct (1 + 2) from the value of proceeds now
4 The result of 3 is the equity component
$ DF at 6% PV
Redemption 10,000 x $50 500,000 0.747 373,500
Interest payments 5% x 500,000 25,000 4.212 105,300
Total 478,800
Proceeds 500,000
Equity element 21,200

405
B9-28
Correcting journal
Being the correction in respect of transaction costs:
$’000
Debit Administrative expenses (IS) 15
Credit Held for trading investment (SOFP) 15
Re-measurement at year end journal:
$’000
Credit Gain or loss (IS) 75
Debit Held for trading investment (SOFP) 75
Purchase of Held for Trading Investment
The held for trading investment should be classified as an asset held at fair value through
profit or loss. It is initially measured at fair value, in this case the cost of $1.75 million
(500,000 shares x $3.50). The transaction costs should not be included in the cost of the
investment and should be written off to the income statement as a period cost. The
investment is subsequently measured (at 30 June 20X9) at fair value of $1.825 million
(500,000 shares x $3.65).