Question 2

Virtuous Ltd issued 5 million N$10 par value 8% preference shares for a price of N$12.50 per share on 1 January 2011.

The preference shares are convertible to ordinary shares on 31 December 2015. Conversion, however, is at the option of the preference shareholders who can elect for redemption of the shares at par value at this date. Any redemption payments will be made on 31 December 2015.

Preference dividends are declared and paid at the end of each calendar year.

An interest rate of 10% is considered to be the market rate (effective rate) for redeemable preference shares at the date of issue.

Virtuous Ltd is also exploring alternative ways of investing their surplus cash. The company has just invested in a portfolio of various corporate bonds. These bonds are held to earn contractual cash flows and the cash flows comprise both a return of the principal amount and interest. The company may as per their practice, trade in investments in the corporate bonds depending on the market prices.

At the beginning of the financial year, 1 January 2015 the investments in corporate bonds had a collective fair value of N$678 000. By 31 December 2015 however, the fair value was N$625 000. Interest received during the current financial year amounts to N$120 000. No investments were sold in the current year due to the unfavourable market conditions in the corporate bond market.

Assume there were no expected credit losses on these investments and also assume that 60% of the preference shares opted for conversion on 31 December 2015.

Present value factor of an annuity of five years at 10% is 3.7907.

Present value factors of N$1 at 10% are as follows:

Year 10%

1 0.9091

2 0.8264

3 0.7513

4 0.6830

5 0.6209

REQUIRED:

a) Discuss fully how management should go about classifying the corporate bonds per IFRS 9 Financial instruments.

b) Explain fully the nature of the preference shares issued by Virtuous Ltd.

c) Prepare the journal entries to account for the preference shares as well as the corporate bonds for the year ended 31 December 2015.

Show all relevant workings for apportionment of liability and equity portions and resulting amortization table