4.1 On 1 January 20.20 Zen Ltd purchased a bond from Day Ltd for R914 530

Question

The maturity date is 31 December 20.23

The following details are applicable to the bond:

Market rate 15% per annum

Coupon rate 12% per annum

Nominal value R1 000 000

Future value R1 000 000

Period 4 years

Interest per annum R120 000 (Payable annually in arrears on 31 December)

Required

(1) Prepare the amortisation table for Zen Ltd for the investment in the above bond.

(2) Prepare the journal entries to account for the bond in the accounting records of Zen Ltd for period of investment.

4.2 Zen Ltd acquired 1000 shares in Waterloo Ltd at a price of R15,00 per share. The shares were acquired on 1 July 20.20 and are held for trading. Transaction costs amounted to R1 000 at year end, 31 December 20.20, the market value of one Waterloo Ltd share was R17, 00

Required

(1) Prepare journal entries to account for the above transaction costs in the records of Zen Ltd.

4.3 Zen Ltd acquired 1000 shares in Blue Ltd at a price of R15, 00 per share.

The shares were acquired on 1 July 20.20. At initial recognition, Zen Ltd made the election to designate the investment in blue as measured at fair value through other comprehensive income.

Transaction costs amounted to R1000 at year end 31 December 20.20, the market value of one Blue Ltd share was R17, 00



Required

(1) Prepare journal entries to account for the above transactions in the accounting records of Zen Ltd.



4.4 Zen Ltd issues 2000 convertible debentures at 1 January 20.20.

The debentures have a three-year term and are issued at face value of R1000 per debenture totaling R2 000 000. Interest is payable annually in arrears on 31 December 20.22, each debenture is convertible into 250 ordinary shares, or the debentures can be redeemed at face value of R1 000 each.

The conversion into shares or cash is at the option of the debenture holder. When the debentures were issued the prevailing market interest rate for a similar debt instrument without a conversion option was 9% per annum.

Required

(1) Calculate the present value of liability component (debentures including interest).

(2) Prepare the amortisation table for Zen Ltd to account for the above convertible debentures.

(3) Prepare the journal entries to account for the above transactions for the period of investment for the year ended.

Answer 1

4.1:

(1) Amortisation Table:

| Date | Opening Balance | Interest Expense | Coupon Payment | Closing Balance |
|-------------|------------------|------------------|----------------|-----------------|
| 1 Jan 20.20 | R914 530 | - | - | R914 530 |
| 31 Dec 20.20 | R914 530 | R120 000 | R120 000 | R914 530 |
| 31 Dec 20.21 | R914 530 | R120 000 | R120 000 | R914 530 |
| 31 Dec 20.22 | R914 530 | R120 000 | R120 000 | R914 530 |
| 31 Dec 20.23 | R914 530 | R120 000 | R1 120 000 (Final Payment)| - |

(2) Journal Entries:

1 Jan 20.20:
Bond Investment Debit R914 530
Cash Credit R914 530

31 Dec 20.20:
Interest Expense Debit R120 000
Bond Investment (Amortization) Credit R120 000

31 Dec 20.21:
Interest Expense Debit R120 000
Bond Investment (Amortization) Credit R120 000

31 Dec 20.22:
Interest Expense Debit R120 000
Bond Investment (Amortization) Credit R120 000

31 Dec 20.23:
Interest Expense Debit R120 000
Bond Investment (Final Payment) Credit R1 120 000

4.2:

Journal Entry:

1 July 20.20:
Investment in Waterloo Ltd Debit R15 000
Transaction Costs Debit R1 000
Cash Credit R16 000

4.3:

Journal Entry:

1 July 20.20:
Investment in Blue Ltd Debit R15 000
Transaction Costs Debit R1 000
Cash Credit R16 000

31 Dec 20.20:
Fair Value Adjustment - OCI (Blue Ltd) Debit R2 000
Transaction Costs Credit R1 000
Investment in Blue Ltd Credit R1 000

4.4:

(1) Present Value of Liability Component:

Using the prevailing market interest rate of 9%:
PV of liability component = R2,000,000 / (1 + 9%)^3 = R1,652,892

(2) Amortisation Table:

| Date | Opening Balance | Interest Expense | Coupon Payment | Closing Balance |
|-------------|------------------|------------------|----------------|-----------------|
| 1 Jan 20.20 | R2,000,000 | - | - | R2,000,000 |
| 31 Dec 20.20 | R2,000,000 | R180,000 | - | R1,820,000 |
| 31 Dec 20.21 | R1,820,000 | R163,800 | - | R1,656,200 |
| 31 Dec 20.22 | R1,656,200 | R149,056 | - | R1,507,144 |
| 31 Dec 20.23 | R1,507,144 | - | R500,000 | R1,007,144 |

(3) Journal Entries:

1 Jan 20.20:
Cash Debit R2,000,000
Convertible Debentures Credit R2,000,000

31 Dec 20.20:
Interest Expense Debit R180,000
Convertible Debentures (Amortization) Credit R180,000

31 Dec 20.21:
Interest Expense Debit R163,800
Convertible Debentures (Amortization) Credit R163,800

31 Dec 20.22:
Interest Expense Debit R149,056
Convertible Debentures (Amortization) Credit R149,056

31 Dec 20.23:
Convertible Debentures (Redemption) Debit R1,000,000
Cash Credit R1,000,000