Reference no: EM133205842

Wharton Bhd, a public listed company, has requested your advice on the accounting treatment for the following financial instrument transactions: On 1 January 2021, Wharton Bhd made a RM10,000 interest-free loan to an employee to be paid back on 31 December 2022. The market rate on an equivalent loan would have been 5%.

Wharton Bhd anticipates capital expenditure in a few years, and invests its excess cash into short and long-term financial assets so it can fund the expenditure when the need arises. Wharton Bhd will hold these assets to collect the contractual cash flows, and when an opportunity arises, the entity will sell the financial assets to re-invest the cash in financial assets with a higher return. The managers responsible for this portfolio are remunerated on the overall return generated by the portfolio.

As part of this policy, Wharton Bhd purchased RM50,000 par value of loan notes at a 10% discount on their issue on 1 January 2021. The redemption date of these loans is 31 December 2024. An interest coupon of 3% of par value is paid annually on 31 December. Transaction costs of RM450 were incurred on the purchase. The annual internal rate of return on the loan notes is 5.6%.

At 31 December 2021, due to a decrease in market interest rates, the fair value of these loan notes increased to RM51,000.

Required

Discuss, with suitable calculations, how the above financial instruments should be accounted for in the financial statements of Wharton Bhd for the year ended 31 December 2021.