QUESTION ONE

The directors of Molar Limited, a property development and management company, would like your advice on accounting treatment of various transactions in accordance with appropriate International Accounting Standards.

(i) Transaction One

Molar Limited intends to construct twenty (20), two-bed - roomed flats starting 1 April 2014. The flats will be let out to various customers at a monthly rental of K3,000 payable three (3) months in advance. Further, tenants will be required to make a security deposit equal to one months rent at the time they take occupancy of the flats. The security deposit is refundable upon termination of tenancy agreement by either tenant or Molar Limited and after deducting repair costs relating to any damage to the property caused by the tenant. Construction of flats commenced on 1 April 2014 and flats are expected to be ready for occupation on 31 March 2015.

The transaction has not been recorded in the books of Molar Limited.

(ii) Transaction Two

Molar Limited issued a four (4) year 12% convertible loan stock on 1 April 2015 for K900,000. The company incurred issued costs of K90,000. The convertible loan stock will be redeemed at its book value at the end of a four year period.

The effective interest of a similar loan stock without conversion rights was 15%. The effect of the issue costs was to increase effective interest rate to 16%.

Interest for the year to 31 March 2016 was paid on 30 March 2016.

Molar Limited has not accounted for the transaction in its financial statements for the year ended 31 March 2016.

Note: The convertible loan stock met both the cash flow and business model tests.

Required:

Write a report to the directors of Molar Limited that:

(a) Explains how the flats will be treated in its financial statements during and after construction has been completed. (6 marks)

(b) Explains how Molar Limited would treat rentals and security deposit in the financial statements for the year ended 31 March 2016. Assume 40% of the flats are occupied the whole year to 31 March 2016 and that no tenant will stay in the flat for less than one year. (6 marks)

(c) Advise Molar Limited on how the convertible loan stock should be treated in its financial statements for the year ended 31 March 2016. (8 marks)

Note: You should include relevant calculations where applicable.