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Financial Instruments

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Financial Instruments

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by P2-D2.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • May 2, 2021 at 4:07 pm #619450
    suleymanabuzerli
    • Topics: 84
    • Replies: 32
    • ☆☆

    The following trial balance extract relates to Howard at 30 September 20X5:
    $000 $000
    Convertible loan notes – Liability component at 1 Oct X4 (note (i)) 28,508
    5% loan notes (note (ii)) 10,000
    Equity investments (note (iii)) 6,000
    The following notes are relevant:
    (i) The convertible loan notes are 8% $30 million convertible loan notes issued on 1 October
    20X4 at par. An equivalent loan without the conversion would carry an interest rate of 10%.
    Howard’s finance director correctly split the instrument into its equity and liability
    components at 1 October 20X4, but has done nothing else.
    (ii) The 5% loan notes were issued at par of $10 million, but Howard incurred $400,000 issue
    costs. The loan notes have an effective interest rate of 8%.
    (iii) The equity investments relate to 1 million shares in Kapoor, an unrelated entity. During the
    year, Kapoor paid a dividend of 10 cents per share. At 30 September 20X5 the fair value of
    each Kapoor share was $7

    What income should be recorded in the statement of profit or loss in relation to the equity
    investments?
    A $600,000
    B $1,100,000
    C $1,600,000
    D $1,000,000

    Dear Sir,answer is 1,100,000 but i can’t understand one point that,

    why 1million$ is recognized as gain ??

    May 6, 2021 at 9:52 am #619835
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 6119
    • ☆☆☆☆☆

    Hi,

    This is the gain in fair value of the equity investment. The 1 million shares were recorded at $6 million at the start of the year but are now worth $7 each at the reporting date. This gives a total fair value of $7 million ( $7 x 1 million shares) and a gain of $1 million ($7 million less $6 million).

    Thanks

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    Posts
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