Reference no: EM132558205

Question (a) Determine whether the following financial instruments should be classified as a financial liability or equity instrument of the respective companies. Give reasons for your answer.

(i) Lemon Bhd issues 1,000,000 RM1 convertible loan stock. The loan stocks pay interest at 6.75%. The market rate for similar debt without the conversion option is 9%. The note is not redeemable, but it converts at the option of the holder into shares that will have a value of exactly RM1,100,000.

(ii) Peppermint Bhd issues 1,000,000 redeemable preference shares for RM1.00 each. The shares are redeemable at the option of the Peppermint Bhd. The shares carry a cumulative 7% dividend. On 2 January 2020, Peppermint Bhd announces its intention to redeem the shares on 31 December 2022 for cash at 10% premium.

Question (b) Wintergreen Bhd enter into an agreement with a landlord to lease a building for 6 years. The lease rental for the first year is fixed at RM500,000, payable in arrears at the end of the year.

Required:

Determine whether the lease agreement contains an embedded derivatives if the subsequent lease rentals are:

(i) increased at a rate of 7.5% per annum.

(ii) are adjusted for equivalent changes in the property price index.