Question 1 (6 marks)

Explain why financial instruments can be classified as financial liabilities or equity instruments. References to relevant accounting standards are required.

Question 2 (4 marks)

On 1 September 2017, Silver Ltd entered into a forward exchange rate contract to purchase US$600 000 at a rate of A$1 = US$0.69. This is also the sport rate on the day.

On 2 September 2017 Silver Ltd took delivery of inventory from its US supplier at a price of US$600 000 when the spot rate was A$1 = US$ 0.65.

Calculate the amount Silver Ltd would have paid on 2 September 2017 in A$ if it had not entered into the forward exchange rate contract, and any gain or loss it made (rounded to the nearest dollar).

Question 3 (10 marks)

Pembroke Ltd has 2 000 shares in Hutchinson Ltd. The current price of Hutchinson Ltd's shares is $50 per share. Pembroke Ltd will need to sell these shares in 10 months to acquire cash for a capital project. Pembroke Ltd is concerned about the price fluctuations over the next 10 months, and decides to enter a future contract on Hutchinson Ltd's shares, in which Pembroke Ltd takes a sell position. The price of the future is $52 and the contract is for 2 000 futures.

Ten months later, the price of Hutchinson Ltd shares has fallen to $45.00 and the market price of a future with Hutchinson Ltd is now $48.00.

1. Calculate the total gains and losses Pembroke Ltd receives for the above transactions. Show all your workings.
2. (5 marks)
3. Explain why Pembroke Ltd would have entered into a futures contract. Would Pembroke Ltd have been in a better financial position if it hadn't taken out the futures contract? Explain why. Show all your workings.
4. (5 marks)