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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 $’000Net 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: $’000Debit Financial assets held for trading (SOFP) 51 Credit Bank (SOFP) 51 Subsequent re-measurement journals: $’000Debit 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 measurementis at fair value with the gains and losses taken to the income statement at each re-measurement. B9-27 Answer $21,200Revision 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: $’000Debit Administrative expenses (IS) 15 Credit Held for trading investment (SOFP) 15 Re-measurement at year end journal: $’000Credit 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).