ACCT 320-S1 (12:30-1:45)
Spring 2022
Samia Ali
Long Quiz 2
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Attempt all parts
Time allowed 40 minutes
Total marks 15
Name:
Roll No:
Question
1
2
Marks
10
5
15
Score
1) Layla Industries issued Rs 6,000,000 of 8% debentures on May 1, 2019 and received cash of
Rs 5,323,577. The bonds pay interest semiannually on May 1 and November 1. The maturity
date of the bonds is November 1, 2022. The bonds were sold to yield an effective interest
rate of 10%
i)
Prepare the amortization schedule for the bonds for the first two years (Round to
nearest Rs)
ii)
Consider the following independent situations and make appropriate entries
a) The debenture was issued at July 1st 2019. What entries should be made at issue of the
debenture
b) 2 years after the issue date on May 1, 2021 Layla calls the entire issue at 96 and cancels
it.
c) Layla is experiencing liquidity issues and is unsure about its ability to repay so it uses
some of its inventory to settle the debt on May 1, 2020. Inventory has a fair value of PKR
5,000,000 and carrying value of PKR 4,700,000 on the books.
d) Layla is experiencing liquidity issues and is unsure about its ability to repay so plans to
issue 200,000 ordinary shares to the debenture holders. Layla issues the shares on May
1, 2020 each share has a par value of Rs 10 and listed value of Rs 27.50.
SEE SOLUTION IN EXCEL
2) In January 2020, Zafar, whose functional currency is PKR, decided that it was highly probable
that it would buy an item of plant in one year’s time for $ 200,000. As a result of being risk
averse, it wished to hedge the risk that the cost of buying $ would rise and so on 1st January
2020 Zafar entered into a forward rate agreement to buy $ 200,000 in one year’s time for
the fixed sum of PKR1,000,000. The fair value of this contract at inception was zero. At
Zafar’s reporting date of 31 July 2020, the $ had depreciated and the value of $200,000 was
PKR 900,000. The fair value of the derivative had declined by PKR100,000. These values
remained unchanged until the plant was purchased.
Required
a) Explain the type of financial instrument Zafar is using and show the accounting
treatment for it in the year ended 31 July 2020. (3 marks)
This is a cash flow hedge as Zafar is hedging the impact of changes in cash flow from the
purchase of $’s when Zafar is planning to purchase the plant (1 mark)
The derivative has fallen in value by Rs100,000 but the cash flows have increased in
value by Rs100,000 (it is now Rs100,000 cheaper to buy the asset). Because it has been
designated a cash flow hedge, the movement in the value of the hedging instrument is
recognised in other comprehensive income ( 1mark for explanation 1 mark for entry)
Unrealized holding gain/loss OCI 100,000
Forward contract
100,000
b) Discuss how Zafar should record the purchase of the plant when acquired a year later
(2 mark)
The forward contract will be settled and closed when the asset is purchased. The loss on
the hedging instrument held within equity is adjusted against the carrying amount of the
plant. The plant will be on the books for Rs 900,000, Cash of Rs 1,000,000 will be paid
and the liability of the forward contract will be settled (100,000). (1mark)
The loss carried in OCI will be adjusted against the plant. Plant will be carried at Rs
1,000,000 (1 mark)