Seminar Question $9\mathrm{.}1$

You are the Finance Director of Nerf Plc$.$ A new Managing Director has recently been appointed and he has some questions for you following a review of the latest set of financial statements. The company$$s year end is $30$ September $20$X$5.$

He has noted that the company has a number of financial instruments and whilst he understands that these financial instruments are initially recorded at fair value he does not understand how they are accounted for after initial recognition.

Specifically, he has noted the following transactions:

$($i$)$ Issue of a debt instrument to Wise plc

Nerf Plc issued a debt instrument on $1$ October $20$X$4.$ It had a nominal value of $90,000$ and was issued at a discount of $10,000.$ It is redeemable on $30$ September $20$X$7(3$ years from issue$)$ and the effective rate of interest on the instrument is $7\%.$ The instrument had a coupon rate of $4\%$ and is redeemable at a discount of $3,570.$

$($ii$)$ Issue of a convertible loan note to Owl plc

Nerf Plc issued $7\%$ convertible loan notes at their nominal value of $25,000$ on $1$ October $20$X$4.$ At the redemption date of $1$ October $20$X$8$ the holders have the option to receive the nominal value in cash or to convert the loan notes into equity shares. A similar non$-$convertible loan note would have an interest rate of $9\%.$

Discount table as follows:

Year $7\%9\%$

$10\mathrm{.}9340\mathrm{.}917$

$20\mathrm{.}8730\mathrm{.}842$

$30\mathrm{.}8160\mathrm{.}772$

$40\mathrm{.}7630\mathrm{.}708$

$($iii$)$ Shares held in Target plc

The company bought $100,000$ shares in Target plc on $1$ February $20$X$5$ for $2$ per share. They are proving to be an excellent investment and the price has risen steadily over the last few months, despite recent problems on the stock market. The share price at $30$ September $20$X$5$ is $4\mathrm{.}50.$ The company intends to hold onto these shares in the long term.

$($iv$)$ Shares in Dodgey plc

This investment has not proved so successful. These shares are not doing well and the company intends to sell them as soon as possible. The company invested in $10,000$ shares in Dodgey plc on $1$ January $20$X$5$ at a cost of $8\mathrm{.}00$ per share. At $30$ September $20$X$5$ the shares had a market value of $4\mathrm{.}90$ per share. The company is planning on selling the shares in January $20$X$6.$

REQUIRED:

a$)$ Define the following terms:

$($i$)$ Financial instrument

$($ii$)$ Financial asset

$($iii$)$ Financial liability

b$)$ From the information given in $($i$)($iv$)$ advise the Managing Director on the following;

$($i$)$ For the debt instrument to Wise plc calculate the value to be recorded in the Statement of Profit or Loss and Statement of Financial Position at $30$ September $20$X$5,30$ September $20$X$6$ and $30$ September $20$X$7$ for this financial liability. Show the journal entries for all $3$ years

For the convertible loan note to Owl plc calculate the values to be recorded in the Statement of Profit or Loss and Statement of Financial Position at $30$ September $20$X$5$ and $30$ September $20$X$6$ for this financial liability $($both debt and equity$).$ Show the journal entries for both years.

$($ii$)$ Explain how to account for the share investments in Target plc and Dodgey plc$.$ Calculate the value to be recorded in the Statement of Profit or Loss and Statement of Financial Position at $30$ September $20$X$5$ for these two share investments.