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referring to additional information no. 4 in the past year question,
Ashanti purchased a $20m 5-year bond with semi annual interest of 5% payable on 31oct and 30apr. The purchase price of the bond is $21.62. The effective annual interest rate is 8% or 4% on semi annual basis. The bond is classified as available-for-sale. At 1 May 2009, there’s $21.05, the amortized cost of the bond and there’s loss recognised in equity of $0.6m, resulting a carrying amount of $20.45. The issuer of the bond did not pay the interest due on 31 october 09 and 30 apr 10, and the future cash receipts are $2.34m on 30 april 2011 and $8m on 30 april 2012. Current interest rate for discounting cash flows as at 30 april 2010 is 10%.Is the answer scheme for the treatment of this bond still valid? (in case there’s a revision in the standard that makes the treatment different)
The amortised cost use to calculate the interest should be $21.05 (before the loss of $0.6m) or $20.45m(after loss is recognised)?
and could you please explain how to treat the “loss recognised in equity of $0.6m , i go through the answer scheme, but i don’t understand why is it done so.
And there’s no payment made of $1m (20m x 5%) every year, so it will not be deducted every 30apr and 31 oct? We only deduct the $1m interest on bond when the issuer pay the interest is it? in this case, the issuer did not pay and the answer scheme did not deduct the $1m.
and one question which is irrelevant to the requirement of Ashanti,
in case the bond is purchase in the current year, $20m 5 year bond with purchase price $21.42m, what’s the double entry for it?
Dr. available for sale inv 20m
Dr. ?????
Cr. Cash 21.42mThe interest accrual for October 2009 and April 2010 (not yet paid) is shown in working 4 in the examiner’s answer as .82 and .85 and has been shown in the consolidated income statement as the single figure of 1.67
Without actually calculating how we arrive at the amortised cost as given in the question, the interest should be accounted for before the loss is recognised. that would then give us a carrying value of 22.12 against which the present value is compared to arrive at an impairment of 13.98. This figure of 13.98 includes the reclassification of the .6m previously recognised in equity. This amount is added back as a comprehensive income but at the same time is deducted in the statement of income in arriving at consolidated profit before tax.
As for the 1m each year, there’s no way Ashanti is going to receive this! Instead, I quote the question, “the best estimates of total future cash receipts are $2·34 million on 30 April 2011 and $8 million on 30 April 2012” These estimates take into account the estimated cash flows for the two remaining years and those estimates replace the anticipated flow of 1m interest each year
re your supplementary question, why not include the full 21.42 in asset held for sale at cost with annual adjustments to reflect the difference in effective interest rate compared with the stated coupon rate?
Hope that does it for you!
Hi Mike
I have a couple questions regarding this Ashanti question… firstly it threw me i found it rather difficult at first but getting my head around all the information is my challenge!!!
My questions are as follows;
1. Why do they put the fair value adjustment for the plant of £2000 to admin costs would this not be added to COS as deprn?
2. Also in admin exp they also include the revaluation figure from the PPE why is this?
3. Why when calculating the employee benefits- holiday entitlement do they calculate total days worked by the total workers of 900 and not by the employees who remain in the company… as the question states that 5% of employees will be leaving without holiday pay?
and lastly when calculating the associates profits and comp income we use the share that the subsidiary has in it and not the group share is this correct? (what i mean is we calculate the TNCI as 44% but we only take 30% of the associates profit!)
Many thank
Jemma
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