Lecture example 1

Which of the following is NOT a financial asset?

A. Trade receivables
B. Short-term deposits
C. Investment in Treasury bonds
D. Prepaid rent
E. All of the above items are financial assets

Lecture example 2
Which of the following is NOT a financial liability?
A. Corporate bonds issued by the company
B. $2 million loan taken from NAB
C. Restoration provisions
D. Wages payable
E. All of the above items are financial liabilities

Lecture example 3
On 1 July 2022, Jack Ltd acquired some bonds issued by Mick Ltd. These bonds had a ‘face
value’ of $1 million in total and offered a coupon rate of 10% paid annually in arrears (i.e. the
first coupon will be paid on 30 June 2023). The face value will be paid on 30 June 2026.
Assume that there were no transaction costs associated with acquiring the bonds. At the time
of purchase, the market only required a rate of return of 8% on such bonds.

Jack Ltd operates within a business model where government bonds are held to collect
contractual cash flows and there is no intention to sell them. The company does not elect to use
FVPL.

a) What is this type of financial asset?

b) Calculate the amortised cost of the bonds as of 30 June 2023, 2024, 2025 and 2026
c) Provide the journal entries for the years ending 30 June 2023 and 2024

Assume that on 30 June 2023, right after the coupon payment, the market interest rate for these
bonds decreased to 6%.

d) What are the journal entries for the year ending 30 June 2023 if Jack Ltd has the
objective of both collecting contractual cash flows as well as selling bonds? The
company does not elect to use FVPL.

e) What are the journal entries for the year ending 30 June 2023 if Jack Ltd has elected to
use fair value through profit or loss (FVPL)?
Lecture example 4
On 1 July 2022, Bear Ltd acquired 100 000 shares in Island Ltd at a price of $10 each. There
were brokerage fees of $1500. The closing market price of Island Ltd shares on 30 June 2023—
which is the entity’s financial year end—was $12.

a) Bear Ltd has not made the election to account for its equity investments at fair value
through OCI. Provide the required journal entries for Bear Ltd to account for the
investment in Island Ltd.

b) Bear Ltd has made the decision to measure the equity investment at fair value through
other comprehensive income. Provide the required journal entries for Bear Ltd to
account for the investment in Island Ltd.

Lecture example 5
Refer to example 1, Provide the journal entries for the years ending 30 June 2023 and 2024
from Mick Ltd’s perspective.

Lecture example 6
Grom Ltd issues $10 million of convertible bonds on 1 July 2022. The bonds have a life of four
years and a face value of $10.00 each, and they offer interest, payable at the end of each
financial year, at a rate of 6% per annum. The bonds are issued at their face value and each
bond can be converted into one ordinary share in Grom Ltd at any time in the next four years.
Organisations of a similar risk profile have recently issued debt with similar terms, without the
option for conversion, at a rate of 8% per annum.

REQUIRED:
a) Calculate the value of the liability component and the equity component on 1 July 2022.
Also, provide the journal entries to account for the issuance of the convertible bonds.
b) Calculate the stream of interest expenses across the four years of the life of the bonds.
c) Provide the accounting entries if the holders of the options elect to convert the options
to ordinary shares at the end of the third year of the bonds.