MBS678 CORPORATE ACCOUNTING
LECTURE 8 EXAMPLES
Lecture Example 1
Consider the following financial instruments and determine whether financial assets,
financial liabilities or equity instruments are in existence:
a) Company A loans Company B $400 000 repayable in two years.
b) Company C acquires 10 000 shares in Company D at a price of $5 per share.
c) Company E acquires 100 000 call options in Company F, which provides Company E
with the right to acquire shares in Company F for $11 per share in 3 years’ time. The
options cost Company E $2 each and were acquired when the market price of
Company F shares was $10.50. The options were written by Company G, meaning
that if Company E decides to exercise the options to buy shares – which would
happen if the share price rises above the exercise price of $11 – then Company G
would need to go to the market and acquire the shares in Company F to satisfy the
contractual obligation to Company E.
Lecture Example 2
Gourmet Ltd issues $10 million of convertible bonds on 1 July 2021. The bonds have a life of
4 years and a face value of $10 each, and they offer interest payable at the end of each
financial year, at a rate of 6% per annum. The bonds are issued at their face value and each
bond can be converted into one ordinary share in Gourmet Ltd at any time in the next four
years. Organisations of a similar risk profile have recently issued debt with similar terms
without the option for conversion at a rate of 8% per annum. Discount rate at 8% for 4 years
(single payment 0.73503), annuity (3.312113).
Required:
a) Identify the present value of the bonds and allocate the difference between the present
value and the issue price to the equity component, provide the appropriate accounting
entries.
Present value of bonds at market rate of debt
GENERAL JOURNAL
Lecture Example 3
On 1 July 2022, Jack Ltd acquired some corporate bonds issued by McCoy Ltd
These bonds cost $1 066 242. They had a ‘face value’ of $1 million and offered a coupon rate
of 10 per cent paid annually ($100 000 per year, paid on 30 June). The bonds would repay
the principal of $1 million on 30 June 2026.
At the time the market only required a rate of return on 8 per cent on such bonds.
Jack Ltd operates within a business model where government bonds are held in order to
collect contractual cash flows and there is no intention to trade them.
Required:
Calculate the amortised cost of the bonds at 30 June 2023 and prepare accounting journal
entries
Present value of interest and principal
Schedule of Amortised Cost
Year Amortised Cost Interest Cash Flows Amortised Cost at
at beginning Expense end
GENERAL JOURNAL
Date Details Dr Cr
Lecture Example 4
On 1 July 2021, Bear Ltd acquired 100 000 shares in Island Ltd at a price of $10 each. The
closing market price of Island shares at 30 June 2022 was $12. Bear Ltd has not made the
election to account for its equity instruments at fair value through OCI.
Required:
Prepare the accounting journal entries for Bear Ltd to account for the investment in Island
Ltd using fair value through profit or loss.
GENERAL JOURNAL
Date Details Dr Cr
Lecture Example 5
On 1 July 2021, Bear Ltd acquired 100 000 shares in Island Ltd at a price of $10 each. The
closing market price of Island shares at 30 June 2022 was $12. Bear Ltd has made the
election to account for its equity instruments at fair value through OCI.
Required:
Prepare the accounting journal entries for Bear Ltd to account for the investment in Island
Ltd.
GENERAL JOURNAL
Date Details Dr Cr
Lecture Example 6 Financial Liabilities Through P&L
On 1 January 2021, Swann Ltd issued three year 5% $30 000 loan notes at nominal value
when the effective interest rate of interest is also 5%. The loan notes will be redeemed at par.
The liability is classified at FVTPL. At the end of the first accounting period, market interest
rates have risen to 6%.
Required:
Provide the journal entries to account for the loan initially and at year end.
Present value of interest and principal
GENERAL JOURNAL
Date Details Dr Cr