Financial Instruments_Class question_Week 2
Financial instrument issues
• The instrument does not determine the classification
• i.e. a bond is not always at amortised cost
• Look carefully at the dates and only do as much as is necessary to answer the question
• Calculations are crucial
• Financial asset = acquired
• Financial liability = issued
2
Effective interest rate calculation
• Two methods to calculate the effective interest rate where an instrument is measured at amortised
cost (financial asset or financial liability);
• Which method to use will depend on how the instrument is paid back – once-off or periodically;
• Example 1 – On 1 January 20x0 you buy 200 R1000 8% debentures for R1025. Interest is paid
annually on 31 December. The debentures mature on 31 December 20x4 at a premium of 5%.
• Example 2 – On 1 January 20x0 you buy 200 R1000 8% debentures for R1025. Interest is paid
annually on 31 December. The debentures mature at a premium of 5% in 5 equal instalments.
3
Financial Instruments_Question
REQUIRED:
Prepare the journal entries to account for the above financial instruments in the records of Manny Ltd
for the year ended 31 December 20x9. (30)
Please note:
• Journal entries can be prepared separately for each financial instrument.
• Journal narrations are not required.
• Round off all amounts to the nearest Rand, except for the effective interest rate where 4 decimals
should be used.
4
Investment in corporate bonds
On 1 May 20x8, Manny Ltd acquired 200 R1 000 8% bonds for R1 088.93 (“all-in-price) per bond.
The clean price at that date was R1 060 per bond. Transaction cost of R2 000 were paid on 1 May
20x8. Manny Ltd will receive interest annually on 31 December. The bonds mature on 31 December
20x12 at a premium of 10%. The bonds fall within a portfolio where the objective of the business
module is to hold the investments in order to collect the contractual cash flows.
Manny Ltd estimated that a 5% default of a 12-month credit loss can be expected with the following
probabilities:
At initial recognition 10%
At 31 December 20x8 10%
• At 31 December 20x9 15%
5
Investment in equity shares
At 1 January 20x9, Manny Ltd holds an investment in the equity shares of Luke Ltd to the value of
R180 000, comprising of 50 000 shares. The shares were originally purchased on 1 March 20x8 for
R2.80 per share, and transaction costs of R20 000 were incurred. Manny Ltd elected to measure
the shares at fair value through other comprehensive income (OCI).
On 30 September 20x9, 10 000 shares were sold for cash, at R4.10 per share. The market value of
the shares on 31 December 20x9 amounted to R3.80 per share.
6
Corporate loans
On 1 January 20x9, Manny Ltd issued 1 000 corporate loans at R100 each. The issue of the
corporate loans resulted in transaction cost of R10 500 incurred by Manny Ltd.
Each corporate loan has interest paid out annually at 12%. The loans will be repaid at their par value
at 31 December 20x12.
Manny Ltd determined that the corporate loans were financial liabilities recognised at fair value
through profit or loss and was measured as such to account for an accounting mismatch.
On 31 December it was determined that the fair value in total for the corporate loans were R96 337.
7
Extra practice question
CW issued 15 000, R200 bonds at a 5% discount on 1 May 2023. Transaction cost amounted to
R8 000 and were paid in cash. The nominal interest rate attached to these bonds were 7% and
interest is payable annually in arrears on 30 April. The bonds are redeemable in two equal
instalments at a 2% premium on 30 April 2025 and 30 April 2026 respectively.
REQUIRED:
Prepare the journal entries to account for the above financial liability in the records of CW Ltd for the
year ended 30 April 2024.