In the preparation of the financial statements for the year ended 31 March 2018 of Kree Crystals Ltd (KC), the following events have taken place during the year but the company does not know how to account for them: 2) 1) KC has invested in certain shares of a listed company and a private company which does not confer control or significant influence over these entities. Those shares of the listed company are acquired for short-term trading while the investments in the private company is for long term strategic purposes and KC intended to avoid volatility in its the financial performance due to the fair value change of the investment in the private company. KC acquired a debt instrument issued on 1 April 2017 at its fair value of $57,092. The debt instrument is repayable on 31 March 2021 at par of $50,000. The debt instrument pays a nominal interest of 9% per annum on par value at every 31 March and it has an effective interest rate of 5% per annum. The debt instrument is measured at amortised cost. On 1 April 2017 the management of KC estimated that the probability of default in the next 12 months was 1%. The expected cash flow shortfall in each year was 30% resulted from only one possible outcome with 100% probability of occurrence. The 9% interest payment was duly received on 31 March 2018. On 31 March 2018 the management of KC estimated that the probability of default until maturity was 14%. The expected cash flow shortfall in each year was 40% resulted from only one possible outcome with 100% probability of occurrence. Required With reference to HKFRS 9 'Financial Instruments', (a) discuss the criteria to use a specific accounting model for equity instrument and determine the accounting model of the equity instruments in the listed company and private company to be used in the financial statements of KC. (6 marks) (b) prepare the journal entries for the purchase of debt instruments in the preparation of the financial statements of KC for the year ended 31 March 2018 respectively. You must use the below present value factors to determine the figures as much as you can. (9 marks) PVF1,5% = PVF2,5% = PVF3.5% = PVF4,5% = 0.95238 0.90703 0.86384 0.82270 PVF-OAL, 5% = PVF-OA2,5% = PVF-OA3,5% = PVF-OA4,5% = 0.95238 1.85941 2.72325 3.54595 In the preparation of the financial statements for the year ended 31 March 2018 of Kree Crystals Ltd (KC), the following events have taken place during the year but the company does not know how to account for them: 2) 1) KC has invested in certain shares of a listed company and a private company which does not confer control or significant influence over these entities. Those shares of the listed company are acquired for short-term trading while the investments in the private company is for long term strategic purposes and KC intended to avoid volatility in its the financial performance due to the fair value change of the investment in the private company. KC acquired a debt instrument issued on 1 April 2017 at its fair value of $57,092. The debt instrument is repayable on 31 March 2021 at par of $50,000. The debt instrument pays a nominal interest of 9% per annum on par value at every 31 March and it has an effective interest rate of 5% per annum. The debt instrument is measured at amortised cost. On 1 April 2017 the management of KC estimated that the probability of default in the next 12 months was 1%. The expected cash flow shortfall in each year was 30% resulted from only one possible outcome with 100% probability of occurrence. The 9% interest payment was duly received on 31 March 2018. On 31 March 2018 the management of KC estimated that the probability of default until maturity was 14%. The expected cash flow shortfall in each year was 40% resulted from only one possible outcome with 100% probability of occurrence. Required With reference to HKFRS 9 'Financial Instruments', (a) discuss the criteria to use a specific accounting model for equity instrument and determine the accounting model of the equity instruments in the listed company and private company to be used in the financial statements of KC. (6 marks) (b) prepare the journal entries for the purchase of debt instruments in the preparation of the financial statements of KC for the year ended 31 March 2018 respectively. You must use the below present value factors to determine the figures as much as you can. (9 marks) PVF1,5% = PVF2,5% = PVF3.5% = PVF4,5% = 0.95238 0.90703 0.86384 0.82270 PVF-OAL, 5% = PVF-OA2,5% = PVF-OA3,5% = PVF-OA4,5% = 0.95238 1.85941 2.72325 3.54595