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:

Arthur Ltd has the following statement of financial position:

Statement of financial position before set-off

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. 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:

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.