Reference no: EM133434281
1. On 1 June 2022 Sydney Ltd enters into a firm commitment with SanFran Co. to buy US$1000000 of inventory.
The inventory will be transferred to Sydney Ltd (making Sydney Ltd therefore liable for the debt) on 1 August 2022, and payment will be made on that date. The financial year end of Sydney Ltd is 30 June. We will assume that the hedging arrangements used by Sydney Ltd qualify for 'hedge accounting' pursuant to AASB 9 and that Sydney Ltd has designated the hedging arrangement as a 'fair value hedge'. The relevant spot rates and forward rates are as follows:
Date Spot rate Forward rate
1 June 2022 US$1.00 = A$1.35 US$1.00 = A$1.40
30 June 2022 US$1.00 = A$1.27 US$1.00 = A$1.42
1 August 2022 US$1.00 = A$1.43 US$1.00 = A$1.43
REQUIRED Provide the journal entries to account for the hedged item and hedging instrument as required on 1 June 2022, 30 June 2022 and 1 August 2022.
2. Malibu Ltd issues $10 million of convertible bonds on 1 July 2022. The bonds have a life of four years and they offer interest, payable at the end of each financial year, at a rate of 7 per cent per annum. The bonds are issued at their face value and each bond can be converted into one ordinary share in Malibu 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 9 per cent per annum.
REQUIRED
(a) Identify the present value of the bonds and, allocating the difference between the present value and the issue price to the equity component, provide the appropriate accounting entries.
(b) Calculate the stream of interest expenses across the four years of the life of the bonds.
(c) Provide the accounting entries if the holders of the bonds elect to convert the bonds to ordinary shares at the end of the third year of the bonds. LO 14.8, 14.14
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