Financial Accounting: GAAP Principles 3e

Tutorial 8.1
(Solution included in
SQB)

Investments in financial
assets

Chapter 8

Basic level

Answer the following 2 cases independently.

Investment 1
Houston Ltd acquired 20 000 shares in NY Ltd on 1 February 20x5 for 210 cents each.
Transactions costs amounted to R300. This investment is an equity instrument with gains and
losses recognised in other comprehensive income (OCI), in compliance with IFRS 9.
NY Ltd declared a dividend of 20 cents per share on 15 May 20x5, and Houston Ltd accepted the
option of receiving a share dividend instead of a cash dividend. NY Ltd issued 20 new shares to
Houston Ltd on 29 May 20x5.
The shares of NY Ltd traded at 250 cents on 30 June 20x5.
Required:
1.
2.

Prepare the necessary general ledger T-accounts to record these transactions for the year
ended 30 June 20x5. Dates can be ignored.
Calculate the amounts (relating to this investment only) to be recognised in the financial
statements of Houston Ltd for the year ended 30 June 20x5.

Investment 2
Houston Ltd further acquired 10 000 8% bonds (with a par value of R100 each) at 102% (ex
interest) on 21 February 20x5. Interest on the bonds is payable annually on 28 February to all
shareholders registered on 15 February. Houston Ltd classified this investment as a trading
investment. Assume no transaction costs.
The bonds traded at 103,5% on 30 June 20x5.
Required:
Prepare the journal entries required to record the investment in the bonds in the general ledger
of Houston Ltd for the year ended 30 June 20x5. Assume that all amounts are material.

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Financial Accounting: GAAP Principles 3e

Tutorial 8.2

Investment held for trading

Chapter 8

Basic level

Trading Ltd bought 50 000 Class A shares in Amgold Ltd on 12 March 20x10, at 1 512 cents per
share. Brokerage costs amounted to R1 200, and marketable securities tax was R50.
Amgold Ltd declared a capitalisation issue of one share for every 100 shares held, at 30 June
20x10, at 1 600 cents per share.
The shares of Amgold Ltd traded at 1 590 cents per share at 30 September 20x10, the financial
year-end of Trading Ltd.
Trading Ltd bought the shares in Amgold Ltd for trading purposes.
Required:
Prepare the journal entries in the records of Trading Ltd for the financial year which ended on
30 September 20x10, to record the shares bought in Amgold Ltd.

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Financial Accounting: GAAP Principles 3e

Tutorial 8.3

Investment in bond, ex and

cum dividend

Chapter 8

Basic level

Shiraz Ltd paid R1 005 000 ex interest on 15 December 20x8 for R1 000 000 9% government
bonds. Interest on the bonds is payable in arrears every 6 months, on 31 December and 30 June.
The bonds are classified at fair value through profit or loss.
R400 000 of the government bonds were sold on 31 May 20x10 for R427 000, cum interest.
The bonds traded at 102% at 30 June 20x10 (30 June 20x9: 102,5%).
Required:
1.
2.

Calculate the interest income to be included in profit or loss for the year ended 30 June
20x10.
Calculate the fair value adjustments to be included in the profit or loss for the year ended 30
June 20x10.

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Financial Accounting: GAAP Principles 3e

Tutorial 8.4

Financial asset at fair value

through other
comprehensive income

Chapter 8

Intermediate level

Garb Ltd acquired 2 500 Class A shares in Bobby Ltd on 1 March 20x6 at R30 each, cum
dividend. Bobby Ltd declared a dividend of R1,20 cents per Class A share on 28 February 20x6,
payable to shareholders registered on 12 March 20x6. Transaction costs amounted to R500.
This investment is an equity instrument with gains and losses recognised in Other comprehensive
income (OCI), in compliance with IFRS 9.
Bobby Ltd announced a rights offer on 1 May 20x7, whereby the company offered its
shareholders the right to take up one Class A share for every ten shares held, at R26 per share.
Garb Ltd exercised all its rights, and subscribed to the new shares on 15 May 20x7, the closing
date of the rights offer.
The market value of Bobby Ltds shares was R32 each at 30 September 20x7 (20x6: R28).
You confirmed that the fluctuations in the share prices at each reporting date were market related
and that this investment was not impaired.
Garbs policy is to release the revaluation surplus to retained earnings when the investment is
sold.
Required:
Prepare the journal entries to record the above transactions in the records of Garb Ltd for the
years ended 30 September 20x6 and 20x7. (Dates are required, but narrations can be ignored.)

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Financial Accounting: GAAP Principles 3e

Tutorial 8.5

Financial asset at
amortised cost

Chapter 8

Basic level

Jumbo Limited acquired a Government bond at 98,2% on 1 July 20x6. Transaction costs
amounted to R810. The bond has a face value of R200 000 and pays interest at 7,5% annually
on 30 June. Jumbo bought this bond as a long-term investment, and it is Jumbos intention to
collect contractual cash flows until 30 June 2012, its maturity date, when it will be settled at par.
This investment is recognised at amortised cost.
The bond traded at 102%, cum interest, on 30 September 20x9. The effective interest rate
applicable to this investment is 7,8% per annum (including transaction costs).
Required:
Prepare the journal entries to record the transactions relating to this investment in the records of
Jumbo Limited for the year ended 30 September 20x9. Dates are required, but narrations and
closing journal entries are not required.

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Financial Accounting: GAAP Principles 3e

Tutorial 8.6

Financial asset at
amortised cost

Chapter 8

Intermediate

Nhlapo Limited acquired a debt instrument on 1 January 20x7 when the market interest rate on
similar debt instruments was 8,7%. Transaction costs amounted to R1 185. The instrument has a
face value (principal amount) of R125 000 and carries fixed interest of 7%, paid annually on 31
December. It is the intention of Nhlapo Limited to manage this investment on a contractual yield
basis and to hold this investment until its maturity date on 31 December 20x10, when it will be
settled at face value. The debt instrument traded at 100,5% at 30 June 20x8 (30 June 20x7:
99,4%).
Required:
1. Calculate the amount at which this investment should initially be recognised. Round to the
nearest rand.
2. Prepare the journal entries relating to the investment in the debt instrument in the records of
Nhlapo Limited for the financial years which ended on 30 June 20x7 and 30 June 20x8.
Dates are required, but narrations can be ignored.
3. Show how and where the respective amounts should be recognised in the financial
statements of Nhlapo Limited at 30 June 20x8 (including comparatives).

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Financial Accounting: GAAP Principles 3e

Tutorial 8.7

Financial liability at
amortised cost

Chapter 8

Intermediate

Gerald Limited issued 1 000 000 10% redeemable preference shares of R5 each on 1 July 20x3
at par. The preference shares are redeemable on 30 June 20x6 at a premium.
The coupon on these preference shares of 10% per annum is payable every six months on 30
June and on 31 December.
The effective interest rate that discounts the future payments to the present value amounts to
11,8% per annum (or 5,8445% for 6 months).
The companys current financial year-end is 30 June 20x6.
Required:
1.
2.

Prepare the journal entries relating to this instrument for the years ended 30 June 20x5 and
30 June 20x6.
Show how this financial liability should be disclosed in the financial statements for the year
ended 30 June 20x6 (including comparatives).

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Financial Accounting: GAAP Principles 3e

Tutorial 8.8

Financial liability at
amortised cost

Chapter 8

Intermediate

Tiger Limited offered the following debt instrument to the public at the end of March 20x1 in order
to raise additional finance required for an expansion:
60 000 12% debentures are offered for subscription at par value of R100 each. The
debentures will be issued at par on 1 April 20x1 and are redeemable on 31 March 20x9 at a
premium of R8 each. Interest is payable annually on 31 March.
Tiger Limited incurred transaction costs amounting to R20 000 when the debentures were issued.
The effective interest rate that discounts the future cash flows to the present value of the
debentures is 12,7027%.
Required:
Show how this debt instrument should be recognised in the financial statements of Tiger Limited
for the year ended 30 June 20x6 (including comparatives).

Department of Accounting, UCT and Oxford University Press Southern Africa