Chpt 8 Financial Assets

Question 1

Financial asset held to maturity

Payment certain

Answer 1

Amortised cost = PV future CF

Question 2

Loans and receivables cash flow certain

Answer 2

Amortised cost

Question 3

Financial asset at fair value through profit and loss

Short-term ownership held for trading and all derivatives

Answer 3

Fair value with movement in Fair value passing through statement of profit and loss

Question 4

Available for sale financial assets e.g. long-term shareholding in another company (cash flow not certain)

Answer 4

Fair value with movement in fair value passing through reserve/other comprehensive income

Question 5

Transaction costs

Answer 5

Add to assets and deduct from liabilities

Question 6

Redeemable preference shares (liability)

Initial recording

Answer 6

Debit cash (investment minus transaction cost)

Credit liability (investment minus transaction cost)

Question 7

Debt instrument long-term

Dr/Cr

Answer 7

Debit finance costs

Credit non-current liabilities

Question 8

Held to maturity

Dr/Cr

Answer 8

Debit investment (investment plus transaction cost)

Debit profit or loss (transaction cost)

Credit bank (investment plus transaction cost)

Question 9

Convertible bonds

Dr/Cr

Answer 9

Debit cash (initial carrying amount)

Credit non-current liabilities (present value of liability)

Credit equity (balancing amount)

Question 10

Carrying amount of preference shares

Answer 10

Cost: (no. shares x redeemable value)
Less: Transaction Cost
Add: Finance cost {(Cost-trans cost)} x interest rate
Less coupon/cash paid (Cost x preference shares %)

Question 11

Total finance cost associated with bonds (eg repayment in 10 years time)

Answer 11

Interest payable (nominal value x coupon rate% x no. yrs)
Plus Repayment (e.g. nominal value + premium)
Less (nominal value - transaction costs)