Reference no: EM133079394

Question -

i) Briefly explain the nature of a compound financial instrument and the required accounting treatment for such an instrument.

ii) On 1 July 2020 Pitten plc issued a £600,000 5% convertible bond at par. Interest is payable on 30 June each year. The bond is redeemable at par on 30 June 2025 but may be converted into ordinary shares at any time before maturity. The market rate of interest to be used in discounting calculations is 7%. Calculate the liability component and the equity component of this bond. Show full workings.

iii) Newburgh plc purchased a five-year bond on 1 April 2020 at a cost of £10m with annual interest of 4%, which is also the effective rate, payable on 31 March annually. At the reporting date of 31 March 2021 interest has been received as expected and the market rate of interest is now 5%. Explain the accounting for the financial asset at 31 March 2021 on the basis that: Newburgh's business model is to hold such assets to collect the contractual cash flows.