IAS 32.

1
Test 2 - 2016 QUESTION 2 6 marks

As the financial accounting expert in the technical department of an Accounting and

Auditing firm you are required to attend to the following financial reporting matter
relating to FinInn Ltd (‘FinInn’). FinInn has a 31 December financial year end.

You must ignore all forms of taxation.

Convertible preference shares:

FinInn issued 2 million R10 par value 8% convertible preference shares at a premium
of R2.00 per share (also the fair value) on 1 January 20.15. The preference shares are
convertible to a fixed number of ordinary shares on 31 December 20.19. Conversion,
however, is at the option of the preference shareholders who can elect for redemption
of the preference shares at par value at this date. Any redemption payments will be
made on 31 December 20.19.

Preference dividends are declared and paid at the end of each calendar year. An
interest rate of 10% per annum is considered to be the market rate for redeemable
preference shares at the date of issue.

IAS 32.1: REQUIRED

Marks
(a) Calculate the equity and liability components of the convertible
preference shares of FinInn at initial recognition. 3
(b) Prepare the journal entry for the payment of the preference dividends
of the convertible preference shares of FinInn on
31 December 20.15. 3
Total marks 6
You have to comply with International Financial Reporting Standards (IFRSs).
Assume that all current IFRSs have always been in existence. Clearly show all
calculations and work to the nearest Rand and the nearest two decimals when
calculating an effective interest rate. Assume all items and amounts to be material,
unless the contrary is clearly evident from the information given.

You are required to clearly indicate which component, part and/or item of the
financial statement is affected by any journal entry. Journal narrations are not
required.