Question 1 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 2 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.