Reference no: EM132574778

Question - Serena is recently appointed as the new accountant of SP Bhd. The company is in the process of purchasing a new machine that cost RM5 million. Mrs Jean, the chief financial officer informed Serena that the company has insufficient cash to finance the purchase and provided her with two options:

Option 1: To finance the purchase of the machine by issuing RM5,000,000, 7% 5-year bonds on 1 January 2019 with interest payable each 1 July and 1 January. An effective-interest rate of 6% is applied.

Option 2: To finance the purchase under the hire purchase agreement. The company is expected to pay a deposit of RM500,000. The hire purchase is expected to commence on 1 July 2019 for 5 years. The expected interest rate charge is 5% and the company uses sum-of-the-year digits method to amortise the interest. The company uses gross method to account for the hire purchase.

The partial statement of financial position of Skyscraper Property Bhd as at 31 December 2018 is as follows:

Non-current assets 50,000,000

Current assets 30,000,000

Equity 30,000,000

Non-current liabilities (loans and borrowings) 30,000,000

Current liabilities (no loan and borrowings included) 20,000,000

Additional information:

1) The company closes its account at 31 December every year.

2) It is estimated that the useful life of the machine is ten years with no residual value.

3) Both loans are expected to be classified under non-current liabilities.

CASE INSTRUCTIONS:

1. Compare the two options by preparing the pro forma statement of financial position for the year 2019. Assume all the elements in the pro forma statement of financial position will increase by 10% in 2019.

2. Justify which options should be undertaken by SP Bhd.