Reference no: EM133149383

3101AFE Accounting Theory and Practice - Griffith University

Financial Instruments

PART A: GENERAL QUESTIONS

QUESTION 1:
In accordance with AASB 9, the recognition of a financial asset or financial liability will be influenced by considerationsas to whether there is a contractual right to exchange financial assets or financial liabilities with another entity underconditions that are potentially favourable, or potentially unfavourable, to the entity. Explain what this requirementmeans.

QUESTION 2:
Is there a consequence for reported profit or loss if a particular financial instrument, for example, a preference share,is designated as debt rather than equity? Explain the consequence.

QUESTION 3:
The 100 word limit does not apply to this question.

Arthur Ltd has the following statement of financial position:

Loans payable	1 000 000	Loans receivable	1 200 000
Shareholders' equity	1 000 000	Non-current assets	800 000
	$2 000 000		$2 000 000

Assume that Arthur Ltd has an amount owing to Blayney Ltd of $300 000 and an amount receivable from Blayney Ltd of $400 000.

REQUIRED:
Assuming a right of set-off exists, why would Arthur want to perform a set-off? What would be the impact on the debt-to-assets ratio?

QUESTION 4:
On 1 July 2022 Bob Ltd acquired 100 000 shares in McTavish Ltd at a price of $10 each. There were brokeragefees of $1500. The closing market price of McTavish Ltd shares on 30 June 2023-which is the entity's financial yearend-was $12.

REQUIRED
a) Assuming that Bob Ltd has not made the election to account for its equity investments at fair value through OCI, then provide the required accounting journal entries for Bob Ltd to account for the investment in McTavish Ltd using fair value through profit or loss.
b) Provide the required journal entries for Bob Ltd to account for the investment in McTavish Ltd assuming that Bob Ltd has made the election to account for the equity investment at fair value through OCI.

PART B: ANALYSIS QUESTIONS

QUESTION 5:

No Word limit applies to this question.

Woodie Ltd issues $5 million in convertible bonds on 1 July 2023. They are issued at their face value and pay aninterest rate of 4 per cent. The interest is paid at the end of each year. The bonds may be converted to ordinaryshares in Woodie Ltd at any time in the next three years. Organisations similar to Woodie Ltd have recently issuedsimilar debt instruments but without the option for conversion to ordinary shares. These instruments issued by theother entities offer interest at a rate of 6 per cent.
On 1 July 2024 all the holders of the convertible notes decide to convert the bonds to shares in Woodie Ltd.
Provide the journal entries to:
a) record the issue of the securities on 1 July 2023
b) recognise the interest payment on 30 June 2024, and
c) recognise the conversion of the bonds to ordinary shares on 1 July 2024.

Relevant PV values are as follows:
PV Factor for an annuity for 3 years = 2.6730
PV Factor for an amount to be received in 3 years' time = 0.8396