AC3202 Corporate Accounting I, Semester A, 2020/21 (Weeks 9-10)
Financial Assets- Assignments
Question 1:
Discuss the classification of the following financial assets:
(a) B Ltd acquired 100,000 ordinary shares from A Ltd., a listed company in Hong Kong on
15 February 2017. Those shares are held for trading. The shares are held within the
business model whose objective is to collect contractual cash flows and to sell for profits.
(b) D Ltd. purchased 100,000 8% preference shares from C Ltd. which is redeemable by C in
cash on 31 December 2020 i.e. it contains an option. D Ltd has the objective of holding
financial assets to sell for profits.
(c) E Ltd. acquired 10,000,000 ordinary shares from F Ltd., a major supplier of E Ltd on 1
March 2018. These shares were held in order to maintain a strategic good relationship
with F Ltd. E Ltd. has the objective of holding their financial assets to collect contractual
cash flows and to sell for profits.
(d) H Ltd. acquired 5,000,000 options from G Ltd on February 1, 2019. The options are
exercisable into ordinary shares of G Ltd on or before March 1, 2022.
(e) Y Ltd. purchased 10% debentures from S Ltd., a listed company in Hong Kong, on 1
January 2018. The debentures are due to be redeemed by S Ltd at their nominal value on
31 December 2023. Interest is payable annually on 31 December. The debentures are
held within the business model whose objective is to collect contractual cash flows and to
sell for profits.
(f) Z Ltd. purchased 10% debentures from S Ltd., a listed company in Hong Kong, on 1
January 2018. The debentures are due to be redeemed by S Ltd at their nominal value on
31 December 2023. Interest is payable annually on 31 December. The debentures are
held within the business model whose objective is to collect contractual cash flows.
Question 2:
On 1 January 2017, XYZ Ltd. acquires bonds carrying a stated interest rate of 13% that will be
held to maturity with the face value of $200,000 for $204,917.42. The interest of bonds are
payable semiannually on June 30 and December 31. The effective interest rate is 12%. The
maturity date of the bonds is 31 December 2019.
a. Work on the amortization schedule of the bond investment.
Date Gross interest Effective interest Premium Amortised
income amortised Cost
1.1.17
30.6.17
31.12.17
1
30.6.18
31.12.18
30.6.19
31.12.19
b. The bond investment is classified as financial assets at amortised cost. On 30 June, 2018
after receiving the semiannual payment, the bond investment is sold for $202,000.
Provide accounting entries related to the bond investment in years 2017 and 2018.
c. The bond investment is classified as FVTPL. The fair value of the bond investment is
$210,000 on 31 December 2017. On 30 June, 2018 after receiving the semiannual
payment, the bond investment is sold for $202,000. Provide accounting entries related to
the bond investment in years 2017 and 2018.
d. The bond investment is classified as FVTOCI. The fair value of the bond investment is
$210,000 on 31 December 2017. On 30 June, 2018 after receiving the semiannual
payment, the bond investment is sold for $202,000. Provide accounting entries related to
the bond investment in years 2017 and 2018.
Question 3:
ABC Ltd acquired the shares of Euro Company. The details of the shares were as follows:
15.1.2016 Acquired 100,000 shares @$30 per share by cash
31.12.2016 The market value of the shares increased to $38 per share
31.12.2017 The market value of the shares decreased to $36 per share
14.12.2018 All of the shares were sold for $4,500,000
Prepare the journal entries for the investment in each year assuming.
(1) The shares are measured at FVTPL.
(2) The shares are measured at FVOCI.
Question 4 (Adapted from HKICPA):
On 1 July 20X1 Booker Williams (BW) acquired $40 million 5% loan stock at a cost of $38
million. Further information is as follows:
Interest is payable annually in arrears.
The loan stock will be redeemed at a 5% premium on 30 June 20X4.
The effective interest rate attached to the loan stock is 8.49%.
The fair value of the loan stock is $38.8 million at 30 June 20X2 and $40.8 million at 30 June
20X3.
The loan stock is held by BW within a business model whose objective is achieved both by
collecting contractual cash flows and selling financial assets.
2
Required
(a) Calculate amounts to be recognised in the financial statements of BW for the years ended 30
June 20X2 and 20X3.
(b) State the relevant journal entries in the years ended 30 June 20X2 and 30 June 20X3.
(c) State the relevant journal entries to recognise the disposal of the loan stock on 31 Dec 20X3
for $43 million.
Question 5 (Modified from HKICPA):
Ranger Cann Company (RCC) advanced an interest-bearing loan to a supplier on 1 January
20X5. The following information relates to this loan at 1 January and 31 December 20X5:
1 January 20X5 31 December 20X5
$ $
Present value of contractual cash flows 8,000,000 8,000,000
Present value of expected cash flows and 8,000,000 – 95% 8,000,000 – 85%
associated probability of default within 7,750,000 – 5% 5,850,000 – 8%
12 months 1,350,000 – 7%
Required
(1) What is the impairment loss at each date, assuming that credit risk has not increased
significantly since initial recognition.
(2) Assume that credit risk has increased significantly on 31 December 20X6. The present
value of expected cash flows and the associated probability of default that may occur at
any time in the term of the loan is $6,000,000 at 40% and $3,000,000 at 60%. What is the
impairment loss in 20x6?
