ACCC 371

STUDY UNIT 8:
FINANCIAL INSTRUMENTS

CLASS QUESTIONS
Compiled by: Prof RR de Villiers
Reviewed by: Prof RR de Villiers
Copyright © 2020 edition. Review date 2020.

No part of this document may be reproduced in any form or in any way without the written permission of the publishers.

ACCC 371 – STUDY UNIT 8 – FINANCIAL INSTRUMENTS – CLASS QUESTIONS 1/5

CLASS QUESTION 1

A Ltd incurred the following transactions for the financial year ended 31 December 2014:

1. Ltd purchases 50 000 ordinary shares in B Ltd.

2. A Ltd holds debentures in B Ltd.

3. A Ltd issues ordinary shares to B Ltd.

4. A Ltd issues debentures to B Ltd that will be redeemed in cash.

5. A Ltd issues debentures to B Ltd that will be redeemed in A Ltd’s ordinary shares (A Ltd will
thus give some of its shares to B Ltd, instead of cash). Redemption occurs at 35 000
shares of R6 each (thus R210 000 worth of shares). Interest is not compulsory.

6. A Ltd issues debentures to B Ltd that will be redeemed in A Ltd’s ordinary shares (A Ltd will
thus give some of its shares to B Ltd, instead of cash). Redemption occurs at as many
shares as are needed to redeem R210 000, based on the market value of A Ltd’s shares.
If, for instance, A Ltd’s shares have a market value of R5 each, 42 000 shares are needed
(210 000 ÷ 5). If, however, the market value is R7 per share, only 30 000 shares are
needed, etc.

7. A Ltd purchases stock from B Ltd. The amount will be paid back in 30 days.

8. B Ltd deposits R100 000 into A Ltd’s bank account.

YOU ARE REQUIRED TO:

Classify each of the transactions between financial assets, financial liabilities and
1.1
equity in the records of A Ltd. Briefly motivate your answer.

ACCC 371 – STUDY UNIT 8 – FINANCIAL INSTRUMENTS – CLASS QUESTIONS 2/5

CLASS QUESTION 2

A Ltd issued the following instruments for the financial year ended 31 December 2014:

1. 9%-Convertible preference shares. These preference shares are compulsory convertible

into ordinary shares on a 1:1 basis after 5 years. The preference dividends are non-
cumulative and the dividends are discretionary.

2. 10%-Redeemable preference shares. These preference shares pay compulsory,

cumulative dividends and are compulsory redeemed in cash after 5 years.

3. 11%-Redeemable preference shares. These preference shares’ dividends are under

discretion of A Ltd and A Ltd can choose to redeem them after 5 years.

4. 12%-Redeemable preference shares. These preference shares pay compulsory,

cumulative dividends. They will be redeemed after 5 years if A Ltd’s net profit percentage
has increased by at least 5% over the 5-year period.

5. 13%-Convertible debentures. The holder of these debentures has the choice to choose
after 5 years that the debentures are redeemed in cash, or that they are converted into a
variable amount of ordinary shares in A Ltd.

6. 14%-Debentures. These debentures will never be redeemed, but pay 14% interest each
year.

7. An entity issues 2 000 convertible bonds at the start of year 1. The bonds have a 3-year
term and are issued at par with a face value of R1 000 per bond, providing total proceeds of
R2 million. Interest is payable annually in arrears at a nominal annual interest rate of 6%
(the coupon rate). Each bond is convertible at any time up to maturity into 250 ordinary
shares. At the time the bonds were issued, the prevailing market interest rate for similar
debt without conversion options was 9%. At the issue date, the market price of one ordinary
share is R3.

YOU ARE REQUIRED TO:

Classify each of the transactions between financial liabilities, equity or compound
2.1
financial instruments in the records of A Ltd. Briefly motivate your answer.

CLASS QUESTION 3

Bombay Ltd (‘Bombay’) purchased 10% redeemable debentures at its nominal and fair value of
R200 000 on 1 January 2020. Transaction costs to the value of R20 000 was incurred by Bombay.
The debentures are redeemable at R250 000 on 31 December 2025. Bombay holds these
debentures within a business model to collect contractual cash flows of interest and capital only.

YOU ARE REQUIRED TO:

Prepare the journal entries required to account for the debentures in the individual
3.1 financial statements of Bombay for the financial year ended 31 December 2020. Ignore
taxation.

ACCC 371 – STUDY UNIT 8 – FINANCIAL INSTRUMENTS – CLASS QUESTIONS 3/5

CLASS QUESTION 4

Lassy Ltd (‘Lassy’) purchased 200 000 ordinary shares on 1 January 2020 in an unrelated third
party. The shares were purchased at its fair value of R25 per share. Lassy incurred broker fees to
the value of R120 000 with the purchase of the shares. The fair value of the shares amounted to
R30 per share on 31 December 2020. On initial recognition, Lassy elected to measure these
shares at fair value through other comprehensive income.

YOU ARE REQUIRED TO:

Prepare the journal entries required to account for the shares in the individual financial
4.1
statements of Lassy for the financial year ended 31 December 2020. Ignore taxation.

CLASS QUESTION 5

Nominal Ltd (‘Nominal’) bought 1 400 000 debentures in cash for R1 400 000 on 1 January 2020,
which equalled their fair value on this date. These debentures have a nominal value of R1 each
and earn interest of 14% annually payable in arrears. The debentures are redeemable on
31 December 2024 at R1.30 per debenture. Brokerage fees of R9 000 were paid by Nominal on
the date of purchase. The fair value of these debentures was R1.50 per debenture on 31
December 2020. Nominal holds these debentures with the purpose of collecting interest and
capital repayments as well as to sell them in the short term with equal prominence.

YOU ARE REQUIRED TO:

Prepare the journal entries required to account for the debentures in the individual
5.1 financial statements of Nominal for the financial year ended 31 December 2020. Ignore
taxation.

CLASS QUESTION 6

Sally Ltd (‘Sally’) purchased 300 000 ordinary shares on 1 January 2020 in an unrelated third
party. The shares were purchased at its fair value of R30 per share. Sally incurred broker fees to
the value of R140 000 with the purchase of the shares. The fair value of the shares amounted to
R33 per share on 31 December 2020. Sally will sell these shares as soon as the fair value
increase above R35 per share as they are held with the intention of short-term profit making.

YOU ARE REQUIRED TO:

Prepare the journal entries required to account for the shares in the individual financial
6.1
statements of Sally for the financial year ended 31 December 2020. Ignore taxation.

CLASS QUESTION 7

Issue Ltd (‘Issued’) issued 1 200 000 12% bonds in cash for R1 400 000 on 1 January 2020, which
equalled their nominal and fair value on this date. These bonds pay interest annually in arrears.
The bonds are redeemable on 31 December 2024 at R1.35 per bond. Brokerage fees of R12 000
were paid by Issue on the date of issue of the bonds.

YOU ARE REQUIRED TO:

Prepare the journal entries required to account for the bonds in the individual financial
7.1
statements of Issue for the financial year ended 31 December 2020. Ignore taxation.

ACCC 371 – STUDY UNIT 8 – FINANCIAL INSTRUMENTS – CLASS QUESTIONS 4/5

CLASS QUESTION 8

Risk Ltd (‘Risk’) issued 600 000 12% bonds in cash for R700 000 on 1 January 2020, which
equalled their nominal and fair value on this date. These bonds pay interest annually in arrears.
Brokerage fees of R14 000 were paid by Risk on the date of issue of the bonds.

The bonds are redeemable on 31 December 2024 at its initial issue value. These bonds were
designated to be recognised at fair value through profit or loss by Risk. The fair value of these
bonds amounted to R800 000 on 31 December 2020. The fair value of the bonds have therefore
increased with R100 000 of which R20 000 related to a decrease in credit risk.

YOU ARE REQUIRED TO:

Prepare the journal entries required to account for the bonds in the individual financial
7.1
statements of Risk for the financial year ended 31 December 2020. Ignore taxation.

CLASS QUESTION 9

A Ltd issues 2 000 convertible bonds at the start of year 1. The bonds have a 3-year term and are
issued its fair and face value of R1 000 per bond, providing total proceeds of R2 million. Interest is
payable annually in arrears at a nominal annual interest rate of 6% (the coupon rate). Each bond
can be converted at any time up to maturity into 250 ordinary shares or it can be redeemed at the
issue value at the choice of A Ltd. At the time the bonds were issued, the prevailing market interest
rate for similar debt without conversion options was 9%. At the issue date, the market price of one
ordinary share is R3.

YOU ARE REQUIRED TO:

9.1 Compute the liability and equity portion of the compound financial instrument.

CLASS QUESTION 10

On 1 January 2018, A Ltd issued 150 000 10% compulsory convertible debentures with a maturity
date of 31 December 2022 at its fair and face value of R9 each. The debentures pay compulsory
interest at the end of each year and the market-related interest rate for similar debentures without
conversion conditions amounts to 12% per annum. The debentures are compulsory convertible in
to 150 000 ordinary shares. Broker fees to the value of R30 000 was paid by A Ltd in connection
with the issue of the debentures. A Ltd has a 31 December financial year end.

YOU ARE REQUIRED TO:

Prepare the journal entry (or entries) in the records of A Ltd only on the issue date to
10.1
account for the 10% compulsory convertible debentures. Ignore taxation.
Prepare the journal entry (or entries) in the records of A Ltd to account for the 10%
10.2
compulsory convertible debentures until the debentures are converted. Ignore taxation.

END

ACCC 371 – STUDY UNIT 8 – FINANCIAL INSTRUMENTS – CLASS QUESTIONS 5/5