QUESTION 1:

Holder Ltd purchases an options contract from Issuer Ltd that gives Holder Ltd the right to acquire 100 000 options in Torquay Ltd for a price (exercise price) of $10.00 per share. When the contract was exchanged the price of Torquay Ltd shares was $9.00 each. The option entitles Holder Ltd to exercise the options and buy the shares any time within the next six months. If the options are not exercised within the six-month period, then the options will expire.

REQUIRED:

Determine whether a financial liability or financial asset exists from the perspectives of Holder Ltd and Issuer Ltd. Further, if the price of shares in Torquay Ltd falls to $5.00, with the result that it is improbable that Holder Ltd will ever exercise the options, will this change the classification of the options as either financial assets or financial liabilities?

QUESTION 2:

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