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a. According to IAS 32, Investment in equity and debt instruments could be classified in any of three ways, amortized cost, fair value through other

a. According to IAS 32, Investment in equity and debt instruments could be classified in any of three ways, amortized cost, fair value through other comprehensive income and fair value through profit or loss.

Outline the conditions necessary for these classifications.

b. Paraskos NA has been operating in the building material sector of the Namibian Stock Exchange, manufacturing security doors. The business both raises and invest funds in the market depending on the prevailing economic conditions and the state of its cash flows. Paraskos issued and purchased the following liability and asset in the year commencing January 2019.

i. Issues 1,000 convertible bonds on 1 January 2019 at par. Each bond is redeemable in three years' time at its par value of N$2,000 per bond. Alternatively, each bond can be converted at the maturity date into 125 N$1 share. The bonds pay interest annually in arrears at an interest rate (based on nominal value) of 6%. The prevailing market interest rate for 3-year bonds that have no right of conversion is 9%.

Explain how the compound instrument be treated in the financial statement at the inception and provide relevant workings.

3-year discount factors:                Simple          Cumulative

                    6%                                      0.840                  2. 673

                    9%                                      0.772                  2. 531

ii. Purchases loan notes (nominal value N$100,000) for N$96,394 on 1 January 2019, incurring transaction costs of 0.35% of the nominal value. The loan notes carry interest paid annually on 31 December of 4% of nominal value. Paraskos intend to collect contractual cash flows and the business model is to hold till maturity in which case the loan notes will be redeemed at par on 31 December 2021. The effective interest rate is 5.2%. The asset was not considered to be credit impaired at any stage.

The relevant expected credit losses for use in measuring the loss allowance, were as Follows:

- 1 January 2019:        N$6,000

- 31 December 2019: N$9,000

- 31 December 2020: N$8,000

- 31 December 2021: N12,500

Show the amortized cost of the loan notes from 1 January 2019 to 31 December 2021 and provide the journal entries for 31 December 2019 and 2020.

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