Question 3 >> On 1 January 2020, Vivek plc issued 50,000, 100 2 per cent debentures to investors for 55 each. The debentures are redeemable at their par value of 100 in five years' time, 31 December 2024. The interest rate implicit for the debenture is 15.62% per annum. REQUIRED: In accordance with IAS 39 Financial Instruments: Recognition and Measurement calculate the finance cost for Vivek plc in respect of the financial instrument, for each of the five years ended December 2024, and the liability of the financial instrument at the end of each of the year. (10 marks) by Ram plc issued 6 million 7% convertible bonds on 1 January 2020 at par. The bonds are redeemable at par on 31 December 2023 or convertible at that date on the basis of two 1 ordinary shares for every nominal 10 of bonds. At the date of issue the prevailing market rate for similar debt without conversion rights was 9%. The interest due was paid on 31 December 2020 and recorded within finance costs during the year. Note: Extracts from the present value table (present value of 1 per annum, receivable or payable at the end of each year for n years): Note: Extracts from the present value table (present value of 1 per annum, receivable or payable at the end of each year for n years): Interest rates Years 5% 6% 7% 8% 9% (n) 1 0.9520.9430.9350 9260.917 2 0.9070.890 0.8730.8570.842 3 0.8640.840 0.816 0.7940.772 4 0.8230.792 0.763 0.7350.708 5 0.7840.7470.7130.6810.650 Extract: Cumulative present value table: Years 5% 6% 7% 8% 9% (n) 1 0.9520.9430 9350 926 0.917 2 1.859 1.8331.808 1.783 1.759 3 2.7232.763 2.624 2.577 2.531 4 3.546 3.465 3.3873.3123.240 5 4.3294212 4.100 3.993 3.890 REQUIRED: Explain how convertible instruments are initially recognised, in accordance with IFRS 7 Financial Instruments: Disclosures, and prepare the journal entry to record the issue of the bonds by Ram plc. (10 marks) Explain how the bonds will be subsequently measured, in accordance with IAS 39 Financial Instruments: Recognition and Measurement, and prepare the journal entry to record the subsequent measurement of the bonds in the financial statements of Ram plc for the year to 31 December 2020. Prepare extracts that illustrate how the bonds will be presented in the statement of financial position of Ram plc as at 31 December 2020. (5 marks) iii) The directors of Ram plc are reviewing their financing requirements. The directors are in agreement that they should structure their issue of financial instruments in order to be able to classify them as equity rather than debt. Any increase in gearing would be unacceptable. Therefore, they have provisionally decided to make issues of non- redeemable preference shares to raise 5 million. These shares will carry a fixed interest rate of 6%, and because they are shares, they can be classified as equity. REQUIRED Explain to the directors of Ram plc, the accounting treatment of debt/equity classification, required by IFRS7 Financial Instruments: Disclosures, for the proposed issue, advising them on the acceptability of classifying the instruments as equity. (5 marks) TOTAL 30 marks
