Question

ACCOUNTING FOR FINANCIAL INSTRUMENTS     

1. Abacus Property Ltd bought shares in Texas Instruments on 15 August 2017 for $87,000. The intent of this investment was to make a gain. On 1 January 2020 the shares had a fair value and were recorded at $101,000. By the end of the year their fair value had fallen to $47,000. Record the appropriate journal entries for the year ending 31 December 2020. and Type any workings or justifications to the journal entries

Account	Debit	Credit

Account	Debit	Credit

2. Abacus Property Ltd also bought government bonds of the Kingdom of Enchancia for $2,000,333 accounted for using amortised cost on 1 January 2020. Due to uncertainty around royal succession, Abacus estimates that there is a 5% chance of default in the next 12 months which would result in a cash shortfall of $1,800,000 and a 10% chance of cash shortfall of $1,000,000. Record the appropriate journal entries for the year ending 31 December 2020.

Account	Debit	Credit

Account	Debit	Credit

3. Following from 2 above, explain how this differs from the measurement of most other accounting values and whether you view this as consistent with the conceptual framework.

Answer 1

1-

DR - Decrease in Fair Value (Income Statement) 54000

CR -  Financial Asset/Financial Financial Liability (SOFP) 54000

DR - PROFIT AND LOSS/ OCI 54000

CR - Decrease in Fair Value (Income Statement) 54000

2 - Government bond purchase - DR - 2000333

To cash and bank - CR - 2000333

DR - Decrease in Fair Value (Income Statement) 1800000

CR -  Financial Asset/Financial Financial Liability (SOFP) 1800000

DR - Decrease in Fair Value (Income Statement) 1000000

CR -  Financial Asset/Financial Financial Liability (SOFP) 1000000

3.

When an entity first recognises a financial asset, it classifies it based on the entity’s business model for managing the asset and the asset’s contractual cash flow characteristics, as follows:

• Amortised cost—a financial asset is measured at amortised cost if both of the following conditions are met:
  • the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and
  • the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

• Fair value through other comprehensive income—financial assets are classified and measured at fair value through other comprehensive income if they are held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets.
• Fair value through profit or loss—any financial assets that are not held in one of the two business models mentioned are measured at fair value through profit or loss.