ACCT3563 Revision Workshop Slides + Questions
ACCT3563 Revision Workshop Slides + Questions
Phuc Nguyen
Overview of Financial Instruments (AASB 9)
Any contract that gives rise to both a FA
Financial Instruments
and a FL or equity of another entity
Compound instruments ?
Derivatives?
e.g. Convertible Notes/Bonds
Phuc Nguyen
Initial recognition & Subsequent measurement: Financial Assets
Phuc Nguyen
Initial recognition & Subsequent measurement: Financial Liabilities
Phuc Nguyen
Accounting for Compound instruments
(1) At the date of issuance
DR Cash [Market Value * Number of Instruments Issued]
CR Financial Liability [PV Annuity of Coupon + PV of the Face Value]
CR Conversion Option (Equity) [Proceeds – PV Liability]
(2) Subsequent date
DR Interest Expense [PV Liability * Market interest rate]
CR Cash [Coupon rate * Face value]
CR Financial Liability [Balancing item]
(3) If Conversion Option is Exercised
DR Financial Liability [Book value at the conversion date]
DR Conversion Option (Equity) [The value of the option to convert in (1)]
CR Share Capital
(4) If Conversion Option is Not Exercised
Dr Financial Liability [Face Value] ; Dr Conversion Option (Equity)
Cr Cash Cr Retained Earnings
Phuc Nguyen
Overview of Leases (AASB 16)
Lessee Lessor
Most leases
recognised on the Operating Lease
Finance Lease
balance sheet
Except short-
term & low-
value leases
Phuc Nguyen
Lessee – Assume lease payments are made in arrears
Lease liability = PV of Unpaid Lease payments at
inception, incl. fixed payments (excl. executory
costs) + GUARANTEED RV OR Bargain Purchase
DR Right of use asset
Option
Inception CR Lease Liability
CR Cash (if any)
1. What is the most appropriate measurement basis for the bond purchased by 3A Ltd?
2. What is the book value of the bond on 1 July 2021?
3. What is the book value of the bond on 30 June 2022?
Suppose that on 30 June 2022, the market interest rate for this high-yield bond decreased by
3%.
4. What is the book value of the bond on 30 June 2023?
5. Assume that the business model being used by 3A Ltd has the objective of both
collecting contractual cash flows as well as selling bonds. What is the fair value of the
bond on 30 June 2022? Also, provide all relevant journal entries for the year ended 30
June 2022.
6. Assume that the business model being used by 3A Ltd has the objective of trading
bonds. What is the fair value of the bond on 30 June 2022? Also, provide all relevant
journal entries for the year ended 30 June 2022.
Question 2
On 1 July 2024, Parade Ltd issues 2000 convertible notes. The notes have a three-year term
and are issued at par with a face value of $1000 per note, giving total proceeds at the date of
issue of $2 million. The notes pay interest at 4% p.a. annually in arrears. The holder of each
note is entitled to convert the note into 250 ordinary shares of Parade Ltd at contract
maturity. When the notes are issued, the prevailing market interest rate for similar debt
(similar term, similar credit status of issuer and similar cash flows) without conversion options
is 8% p.a.
Required:
Prepare the journal entries of Parade Ltd to account for the convertible notes for each year
ending 30 June under the following circumstances.
1. The holders do not exercise their option and the note is repaid at the end of its term.
2. The holders exercise their conversion option at the expiration of the contract term.
Phuc Ltd entered into an agreement on 1 July 2020 to lease an item of machinery with a fair
value of $664,893 to Sarka Ltd. Below are the terms of the lease agreement:
• Lease term: 5 years
• Economic life: 10 years
• Annual rental payment, paid in arrears (commencing 30 June 2021): $150,000
• Residual value of the machinery at the end of the lease term: $75,000. This amount
is fully guaranteed by Sarka Ltd.
• Residual value of the machinery at the end of the useful life is $30,000.
• Interest rate implicit in the lease is 5% p.a.
The machinery will be depreciated on a straight-line basis. At the end of the lease term, the
machinery will be retained by Sarka Ltd. In setting up the lease agreement, Sarka Ltd
incurred $2,000 in legal fees. The annual rental payment includes $10,000 to reimburse
Phuc Ltd for maintenance costs incurred on behalf of Sarka Ltd.
1. What is the amount of lease liability recognized by Sarka Ltd on the commencement
date (1 July 2020)?
2. What is the amount of right of use asset recognized by Sarka Ltd on 1 July 2020?
3. What is the book value of the right of use asset on 30 June 2022?
4. What is the amount of current liabilities relating to this lease, disclosed by Sarka Ltd
at 30 June 2021?
5. What is amount of non-current liabilities relating to this lease, disclosed by Sarka Ltd
at 30 June 2021?
6. What is the total expense (relating to this lease) recognized by Sarka Ltd for the year
ended 30 June 2021?
7. What is the amount of lease receivable recognized by Phuc Ltd on 1 July 2020?
8. What is the book value of the lease receivable recognized by Phuc Ltd on 30 June
2022?
9. What is the total income, relating to this lease, disclosed by Phuc Ltd for the year
ended 30 June 2022?