Hi there, I need help with these questions.

QUESTION 1:

Do you think that a reporting entity would prefer to classify a financial instrument as debt or equity? Why?

QUESTION 2:

Wedding Cake Ltd has its shares listed on a securities exchange. It has entered a contractual agreement to issue $10 million of its ordinary shares to Island Ltd in two years' time. The number of shares to be ultimately issued will depend on the market price of the shares in two years' time. Should Wedding Cake Ltd recognise a financial liability, or an equity instrument, in relation to this agreement?

QUESTION 3:

Barry Ltd issued some convertible bonds to Bennett Ltd. They have a life of three years and pay interest to Bennett Ltd each six months. The convertible bonds will be converted to shares only if Bennett makes the decision, at any time in the next three years, that it would prefer to receive shares in Barry Ltd, rather than have its funds repaid.

REQUIRED

(a) At the time of issue, should Barry Ltd disclose the convertible bonds as debt, equity or part debt and part equity?

(b) Does the probability of conversion to equity influence whether the convertible bonds are disclosed as debt or equity?

(c) If Bennett Ltd notifies Barry Ltd that it would like to convert the convertible bonds to shares in Barry Ltd then will this influence how the convertible bonds are disclosed in the financial statements of Barry Ltd? Explain your answer.

QUESTION 4

On 1 July 2022 Midget Ltd acquired some corporate bonds issued by Farrelly Ltd. These bonds cost $2 277 220 and had a life of four years. They had a 'face value' of $2 million and offered a coupon rate of 10 per cent paid annually ($200 000 per year, paid on 30 June). The bonds would repay the principal of $2 million on 30 June 2026. At the time, the market required a rate of return on 6 per cent on such bonds. Midget Ltd operates within a business model where government bonds are held in order to collect contractual cash flows and there is no intention to trade them.

Assume that there were no direct costs associated with acquiring the bonds.

REQUIRED

(a)Explain why the company was prepared to pay $2 277 220 for the bonds given that, apart from the interest, they expect to receive only $2 million back in four years.

(b)Determine whether Midget Ltd can measure the government bonds at amortised cost.

(c)Calculate the amortised cost of the bonds as at 30 June 2023, 2024, 2025 and 2026.

(d)Provide the accounting journal entries for the years ending 30 June 2023, 2024, 2025 and 2026.

Relevant PV values are as follows:

PV Factor for an annuity for 4 years = 3.4651

PV Factor for an amount to be received in 4 years' time = 0.7921