Question

QUESTION ONE (20 MARKS)

TechGrow Ltd. is a technology company that has made the following financial transactions in 2023:

Purchased 10,000 shares of CloudSoft Inc. for R500,000 on January 1, 2023. TechGrow intends to hold these shares for long-term capital appreciation. The shares on 30 December 2024 have a fair value of R550 000.
Issued a 5-year bond with a face value of R1,000,000 on March 1, 2023. The bond pays 4% interest annually and was issued at par.
Provided a loan of R200,000 to a subsidiary on June 1, 2023, with an annual interest rate of 5%, to be repaid in full after 3 years.
Entered into a forward contract to sell 100,000 euros for R110,000 on December 31, 2023. The contract will be settled on June 30, 2024.
Required:

How should TechGrow classify and measure the above transactions? Also provide journal entries to account for the above transactions. (20)

Answer 1

In order to classify and measure the transactions made by TechGrow Ltd., we need to understand the nature of each transaction and how they fit into financial reporting standards.

### Transaction 1: Investment in CloudSoft Inc. Shares
**Classification**: This investment is classified as a financial asset measured at fair value through other comprehensive income (FVOCI) since TechGrow intends to hold these shares for long-term capital appreciation.

**Initial Measurement**: This will be recorded at cost of R500,000.

**Subsequent Measurement**: At year-end, the fair value will be assessed. The fair value on December 30, 2024 is R550,000.

**Journal Entry on Initial Purchase** (January 1, 2023):
```
Dr. Investments in CloudSoft Inc. Shares R500,000
Cr. Cash/Bank R500,000
```

**Journal Entry for Fair Value Adjustment** (December 31, 2023):
```
Dr. Fair Value Adjustment (OCI) R50,000
Cr. Investments in CloudSoft Inc. Shares R50,000
```

### Transaction 2: Issuance of Bond
**Classification**: Bonds payable are classified as a liability and measured at amortized cost.

**Initial Measurement**: The bond is issued at par for R1,000,000 with an interest rate of 4%.

**Journal Entry for Issuance of Bond** (March 1, 2023):
```
Dr. Cash/Bank R1,000,000
Cr. Bonds Payable R1,000,000
```

**Journal Entry for Annual Interest Payment** (March 1, 2024):
```
Dr. Interest Expense R40,000
Cr. Cash/Bank R40,000
```

### Transaction 3: Loan to Subsidiary
**Classification**: The loan provided is classified as a financial asset and will be measured at amortized cost.

**Initial Measurement**: Recorded at R200,000.

**Interest income accrued**:

**Journal Entry for Provision of Loan** (June 1, 2023):
```
Dr. Loan to Subsidiary R200,000
Cr. Cash/Bank R200,000
```

**Journal Entry for Interest Income Accrued** (December 31, 2023):
- Interest for 7 months (June - December 2023) = R200,000 * 5% * 7/12 = R5,833.33
```
Dr. Interest Receivable R5,833.33
Cr. Interest Income R5,833.33
```

### Transaction 4: Forward Contract
**Classification**: The forward contract will be classified as a derivative asset or liability, depending on its valuation at each reporting date. Since it’s a contract to sell currency, its fair value will be determined at settlement.

Assuming the value of the forward contract remains R110,000, it's a financial asset.

**Journal Entry for the Forward Contract** (December 31, 2023):
Since the forward contract is not settled yet, we record the gain or loss in the period of accounting.
Assuming the contract's value is unchanged at R110,000:
```
Dr. Forward Contract Asset R110,000
Cr. Other Income/Unrealized Gain R110,000
```

### Summary of Journal Entries:
1. **Investment in CloudSoft Inc. Shares**
- Purchase: R500,000
- Fair Value Adjustment: R50,000 gain
2. **Issuance of Bonds**
- Issued at par: R1,000,000
- Interest Payment: R40,000 annual
3. **Loan to Subsidiary**
- Issued Loan: R200,000
- Accrued Interest: R5,833.33
4. **Forward Contract**
- Recorded at fair value: R110,000

When preparing the financial statements, these transactions will be reflected in the respective balance sheet and income statement sections, contributing to the overall financial position and results of operations for TechGrow Ltd.