Exam (elaborations)
FAC3703 EXAM PACK 2025 {DETAILED QUESTIONS AND ANSWERS }
- Course
- Specific Financial Reporting
- Institution
- University Of South Africa
FAC3703 EXAM PACK 2025 {DETAILED QUESTIONS AND ANSWERS }
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QUESTION 1 (33 marks)(59 minutes)
On 2 January 20.18, Mkana Ltd issued 1 000 convertible bonds at par with a face value R1 500 per
bond, resulting in total proceeds of R1 500 000. These bonds are convertible into 150 ordinary shares
at the option of the holder, on 31 December 20.20. If not converted into shares, the bonds will be
settled in cash at face value. Interest is payable annually in arrears at a fixed interest rate of 7% per
annum. When the bonds were issued, the prevailing market interest rate for similar debt without a
conversion option was 9% per annum.
Mkana Ltd manages its liquidity risk by ensuring that the maturities of its financial assets and liabilities
match according to cash flow requirements and that the company has adequate access to credit.
Expected cash flow requirements are monitored with rolling cash flow budgets.
REQUIRED:
Ex Marks
(a) Prepare the journal entries (cash transactions included) to account for the
above convertible bonds in the accounting records of Mkana Ltd for the year ended
31 December 20.18 to 31 December 20.20. 22
TL 501 Reference: Example 14; compound financial instruments
(b) Disclose the above convertible bonds in the Accounting Policies and Categories
of Financial Liabilities notes to the annual financial statements of Mkana Ltd for the 11
year ended 31 December 20.18.
TL 501 Reference: Learning unit 1.9; presentation and disclosure
33
Please note:
Your answers must comply with the requirements of International Financial Reporting
Standards (IFRS).
Journal narrations are not required.
Show the date of each journal entry.
Round all amounts off to the nearest rand.
Show all data input into your financial calculator, where applicable.
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FAC3703/102
SOLUTION 1
CONVERTIBLE BONDS
The convertible bonds are a compound financial instrument. A compound financial
instrument consists of a liability and an equity component. First, you have to calculate the present
value of the liability component of the compound financial instrument. The difference between the
proceeds received and the liability component will be the equity component.
If the bonds are convertible in shares of the company or paid in cash at the option of the
holder, the issue of the bonds does not have an unconditional right to avoid paying both
the coupon and the R1 500 000 face value on maturity date. The liability component will
thus be calculated as the present value of the payments of R105 000, with the future
value as R1 500 000.
EQUITY COMPONENT OF CONVERTIBLE BONDS
The equity component of the bonds will be presented in the statement of changes in
equity under its own heading. It can then be transferred to other applicable items in the same
statement if the directors so wish.
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SOLUTION 1 (continued)
(a) Journal entries Dr Cr
R R
2 January 20.18
Bank (SFP) 1 500 000
Equity component of convertible bonds (balancing) (SFP) 75 939
Liability component of convertible bonds [C3] (SFP) 1 424 061
Initial recognition of convertible bond
31 December 20.18
Finance costs (P/L) (1 424 061 x 9%) [C4] 128 166
Liability component of convertible bonds (balancing) (SFP) 23
166
Bank (1 500 000 x 7%) (SFP) 105 000
Recognition of effective finance cost and interest paid
31 December 20.20
Finance costs (P/L) (1 472 477 X 9%) [C4] 132 523
Liability component of convertible bonds (balancing) (SFP) 27
523
Bank (1 500 000 x 7%) (SFP) 105 000
Recognition of effective finance cost and interest paid
31 December 20.19
Finance Costs (P/L) (1 447 227 X 9%) [C4] 130 250
Liability component of convertible bonds (balancing) (SFP) 25 250
Bank (SPF) (1 500 000 X 7%) 105 000
Recognition of effective finance cost and interest paid
If the holders of the bonds choose to convert the bonds into shares on the maturity date,
the journal entry will be as follows:
31 December 20.20
Liability component of convertible bonds (SFP) 1 500 000
Share capital (SPF) 1 500 000
Conversion of liability component of convertible bonds to share capital
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