IFRS 19 FINANCIAL INSTRUMENTS QUESTIONS

QUESTION ONE
A company issues 4% loan notes with a nominal value of Sh.20,000,000.
The loan notes are issued at a discount of 2.5% and Sh. 534,000 of issue costs are incurred.
The loan notes will be repayable at a premium of 10% after 5years. The effective rate of
interest is 7%.
Required:
i. What amount will be recorded as a financial liability when theloan notes are issued?
ii. What amounts will be shown in the statement of profit or lossand statement of
financial position for years 1 - 5?

QUESTION TWO
On 1 January 20X1 Mubabaz issued a loan note with a Sh. 50,000,000 nominal value. It was
issued at a discount of 16% of nominal value. The costs of issue were Sh. 2,000,000. Interest
of 5% of the nominal value is payable annually in arrears. The bond must be redeemed on 1
January 20X6 (after 5 years) at a premium of Sh. 4,611,000
The effective rate of interest is 12% per year.

Required:
How will this be reported in the financial statements of Mubabaz over the period to
redemption?

QUESTION THREE
A company invests Sh.5,000,000 in 10% loan notes. The loan notes are repayable at a premium
after 3 years. The effective rate of interestis 12%. The company intends to collect the contractual
cash flows which consist solely of repayments of interest and capital and have therefore chosen
to record the financial asset at amortized cost.
Required:
What amounts will be shown in the statement of profit or loss and statement of financial position
for the financial asset for years 1–3?

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QUESTION FOUR
On 1 January 20X1, Lombotov Ltd. bought a Sh.100,000 5% bond for Sh.95,000, incurring
issue costs of Sh.2,000. Interest is received in arrears. The bond will be redeemed at a
premium of Sh.5,960 over nominal value on31 December 20X3. The effective rate of
interest is 8%.
The fair value of the bond was as follows:
31/12/X1 Sh.110,000
31/12/X2 Sh.104,000

Required:
Explain, with calculations, how the bond will be accounted for in the financial statements over
all the relevant years

QUESTION FIVE
Walala-Hoy raised finance on 1 January 20X1 by the issue of a two-year 2% bond with a
nominal value of Sh.10,000,000. It was issued at a discount of 5%and is redeemable at a
premium of Sh.1,075,000. Issue costs can be [Link] bond has an effective rate of interest
of 10%.

Required:
Illustrate and explain how the financial instruments should be accounted for by the company.

QUESTION SIX
Freshi Barida Ltd. raised finance by issuing Sh.20,000,000 6% four-year loan notes on 1
January 20X4. The loan notes were issued at a discount of 10%, and will be redeemed after
four years at a premium of Sh.1,015,000. The effective rate of interest is 12%. The issue costs
were Sh.1,000,000.

Required:
Illustrate and explain how the financial instruments should be accounted for by the company.

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COMPOUND INSTRUMENTS
QUESTION ONE
Shembeteng Co issues a convertible loan that pays interest of 2% per annum in arrears. The
market rate is 8%, being the interest rate for anequivalent debt without the conversion option.
The loan of Sh. 5 million isrepayable in full after three years or convertible to equity. Discount
factors are as follows:
Discount factor
Year at 8%
1 0.926
2 0.857
3 0.794
Required:
Split the loan between debt and equity at inception and calculate the finance charge for each year
until conversion/redemption

QUESTION TWO
On 1 January 20X1 Mi Amor issued a Sh.50m three-year convertible bond at par.
• There were no issue costs.
• The coupon rate is 10%, payable annually in arrears on31 December.
• The bond is redeemable at par on 1 January 20X4.
• Bondholders may opt for conversion in the form of shares. The terms of
conversion are two 25-cent equity shares for every Sh.1owed to each bondholder
on 1 January 20X4.
• Bonds issued by similar entities without any conversion rights currently bear
interest at 15%.

Required:
How will this be accounted for by Mi Amor?

QUESTION THREE
An entity issues 2% convertible bonds at their nominal value of Sh. 36,000,000. Interest is payable
annually in arrears.
The bonds are convertible at any time up to maturity into 40 ordinary shares for
each Sh. 1000 of bond. Alternatively, the bonds will be redeemed at par after 3
years.

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Similar non-convertible bonds would carry an interest rate of 9.1%. The present
value of Sh. 1 payable the at the end of year, based on rates of 2% and 9.1% are as
follows:

End of year 2% 9.1%

QUESTION FOUR
A company issues 4% convertible bonds at their nominal value of Sh. 5 million. Interest is payable
annually in arrears.
Each Sh.1,000 bond is convertible at any time up to maturity into 400 ordinary
shares. Alternatively, the bonds will be redeemed atpar after 3 years.
The market rate applicable to non-convertible bonds is 6%.
The present value of Sh. 1 payable at the end the of year, based on rates of 4% and 6% are as
follows:

End of year 4% 6%
1 0.96 0.94
2 0.92 0.89
3 0.89 0.84
Required:
i. What amounts will be shown as a financial liability and as equity
when the convertible bonds are issued?
ii. What amounts will be shown in the statement of profit or loss and
statement of financial position for years 1–3?

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