Reference no: EM133106724

Question - Sisman Bhd began its business operation in 2001, as the top electrical supplies brand dealer. Sisman Bhd which is located in Selongor, has currently employed approximately 3,000 staff and has made an extensive change in the management team in order to survive in the recent economic recession in Malaysia due to COVID 19 pandemic. The new financial manager, Mr. Syed Nadzhan presents different transaction-activities to diversify the financial resources for the company. He believed that a little stream of water from different directions can lead to a flood. Mr. Syed Nadzhan proceed with his proposal to secure the financial sources for the company in the current recession. He also suggested that the company has to have an investment to meet the long-term financial goals through investment in equity and debts. For him, investments will guarantee a company an easy access capital in the future besides some returns will be as additional revenue. Investment in shares or bonds can provide stronger returns over the long-term although at a higher level of risk. Therefore, he presented the following transactions to the board of directors (BOD) that company engaged on in order to get consistent finance and income, as follows:

1. Sisman Bhd invested RM1,000,000 in purchasing ordinary shares as available for sale financial asset (AFS). It is proposed that on 1 February 2020, company purchases 100,000 ordinary shares of XNX Bhd for RM10.00 per share (including transaction cost). On 31 December 2020, Sisman Bhd are expected to receive a cash dividend of RM55,000 on its investment.

After the presentation of Mr. Syed Nadzhan, he found that some members in the BOD did not understand the differences between Financial Asset at Fair Value through Profit or Loss (FVTPL) and Held to Maturity (HTM) categories. He also discussed with them the financial situation inside the Sisman company that the company is very conscious of maintaining and improving the company's profile through expanding its business operation. The company has an ongoing need for funds to finance company expansion. When companies need to raise money, selling assets is an option. However, the company cannot sell its assets because they are growing and in the process of acquiring and not selling assets. Mr. Syed Nadzhan noticed that issuing more shares is a popular way to raise capital. But he argued that issuing more shares also means that ownership will spread across a larger number of investors, which often makes each owner's share worth less money. Since investors buy shares to make money, diluting the value of their investments is not favourable outcome. Issuing bonds is another way to raise capital where an investor gives the company an amount of money for a specific period of time in exchange for periodic interest payments at designated intervals. By issuing more bonds, Mr. Syed Nadzhan believed that the company can avoid diluting the value of their investments. On top of that, the company may reduce the amount of taxes a company owes because the interest paid to the bond investors is counted as an expense, which means pre-tax profits would be lower. Mr. Syed Nadzhan prefers bond instead of other types of loan (bank loan) since the interest rate the company has to pay to the bond investors is often less than the interest rate for bank loan. The low rates will help company to invest in new projects.

2. The financing arrangements for issuing the company's bond equivalent to RM4 million has been approved by the company's BOD. Due to highly technical and complicated process, the company hired special parties to perform all procedures related to the issuance of bonds. Completing all the steps for the bond issuance also requires the assistance of a number of financial service providers including the brokers. The company contacted an investment banker for advice on the market place, the possible issuing price and other factors. Investment bankers generally have a good understanding of where, and how to market newly issued bonds. They usually have well-developed investment banking networks and may identify the brokers ablest to market a particular bond offering. With the help from investment bankers, the company marketed all of the bonds through a private placement sale based on pre-negotiated agreements with specific institutional investors. The transaction took place on 1 July 2020. The company paid investment bankers and broker, the costs associated with issuing bonds amounting RM70,000. The legal documents dated 1 July 2020 specified the following information related to the bonds issued: (1) the face value of bond is RM4 million with coupon rate of 6%, (2) length of four years (3) interest payable on 1 January and 1 July. The bond investors require and effective interest rate of 8%. The company year ends on 31 December each year.

Required -

1. For the transaction No 1 (I think it's about "Investment in Shares".)

(i) Prepare the journal entries for the available for sale financial asset.

(ii) If Mr. Syed Nadzhan also asked you to explain the differences between derivatives and non-derivatives financial Asset, what will you say?

2. For the transaction No 5 (I think it's about " Issuing bonds".)

(i) Prepare the journal entries to record the transaction for the bonds issued on 1 July 2020. Show your workings.

(ii) Briefly explain the accounting treatment for interest related to the bond issued on 31 December 2020.