On January 2013, Opera Limited purchased the entire issue of N$ 440 000 redeemable no par...

On January 2013, Opera Limited purchased the entire issue of N$ 440 000 redeemable no par value preference shares, issued by Piano Limited.
 The shares offer fixed preference dividends at 10% per annum on the issue price of N$ 22 each.
 Dividends are payable annually on 31 December.
 Redemption at N$ 26.40 per share (i.e at a premium of N$4 40 per share) is compulsory and scheduled for 31 December 2017
 The effective interest rate is 13.0813%
 The ex-dividend market values of the preference shares were as follow

Date
Market price ( ex-div)
31 December 2013
26.40
31 December 2014
44.00
31 December 2015
17.60
31 December 2016
30.80
31 December 2017
39.60
Ignore the effect of the expected credit losses.
Required:
Prepare all related journal entries in Opera Limited‘s general journal for the years ended 31 December, 2013, 2014, 2015 and 2016, assuming that Opera Limited considers its investment to be
(i) Designated as fair value through profit or loss
(ii) Amortised cost

Expert Solution

Part (i):

Designated at fair value through profit or loss
Date	Account titles and explanations	Debit ($)	Credit ($)
Jan, 2013	Investment	440000
	Bank		440000
	(Being investment made)

31-Dec-13	Bank (20000 x 22) x 10%	44000
	Dividend received		44000
	(Being dividend received)

	Dividend received	44000
	Profit and loss account		44000
	(Being dividend credited in the profit and loss account)

	Investment {(20000 x 26.40) -(20000 x 22)}	88000
	Profit and loss account		88000
	(Being the investment is adjusted to its fair value )

31-Dec-14	Bank (20000 x 22) x 10%	44000
	Dividend received		44000
	(Being dividend received)

	Dividend received	44000
	Profit and loss account		44000
	(Being dividend credited in the profit and loss account)

	Investment {(20000 x 44.00) -(20000 x 26.40)}	352000
	Profit and loss account		352000
	(Being the investment is adjusted to its fair value )

31-Dec-15	Bank (20000 x 22) x 10%	44000
	Dividend received		44000
	(Being dividend received)

	Dividend received	44000
	Profit and loss account		44000
	(Being dividend credited in the profit and loss account)

	Profit and loss account	528000
	Investment {(20000 x 44.00) -(20000 x 17.60)}		528000
	(Being the investment is adjusted to its fair value )

31-Dec-16	Bank (20000 x 22) x 10%	44000
	Dividend received		44000
	(Being dividend received)

	Dividend received	44000
	Profit and loss account		44000
	(Being dividend credited in the profit and loss account)

	Investment {(20000 x 30.80) -(20000 x 17.60)}	264000
	Profit and loss account		264000
	(Being the investment is adjusted to its fair value )

Note 1:

Number of shares (440000 /22)

20000

Part (ii):

Amortized cost
Date	Account titles and explanations	Debit ($)	Credit ($)
Jan, 2013	Investment	440000
	Bank		440000
	(Being investment made)

31-Dec-13	Bank (20000 x 22) x 10%	44000
	Dividend received		44000
	(Being dividend received)

	Dividend received	44000
	Profit and loss account		44000
	(Being dividend credited in the profit and loss account)

31-Dec-13	Amortization cost	88000
	Investment		88000
	(Being annual amortization provided)

	Profit and loss account	88000
	Amortization cost		88000
	(Being amortization cost charged against profit and loss)

31-Dec-14	Bank (20000 x 22) x 10%	44000
	Dividend received		44000
	(Being dividend received)

	Dividend received	44000
	Profit and loss account		44000
	(Being dividend credited in the profit and loss account)

31-Dec-14	Amortization cost	88000
	Investment		88000
	(Being annual amortization provided)

	Profit and loss account	88000
	Amortization cost		88000
	(Being amortization cost charged against profit and loss)

31-Dec-15	Bank (20000 x 22) x 10%	44000
	Dividend received		44000
	(Being dividend received)

	Dividend received	44000
	Profit and loss account		44000
	(Being dividend credited in the profit and loss account)

31-Dec-15	Amortization cost	88000
	Investment		88000
	(Being annual amortization provided)

	Profit and loss account	88000
	Amortization cost		88000
	(Being amortization cost charged against profit and loss)

31-Dec-16	Bank (20000 x 22) x 10%	44000
	Dividend received		44000
	(Being dividend received)

	Dividend received	44000
	Profit and loss account		44000
	(Being dividend credited in the profit and loss account)

31-Dec-16	Amortization cost	88000
	Investment		88000
	(Being annual amortization provided)

	Profit and loss account	88000
	Amortization cost		88000
	(Being amortization cost charged against profit and loss)

Note 2:

Year	Annual interest($)	PV factor @13.0813%	Present value of annual interest
2013	44000	0.88432	38910.06
2014	44000	0.782021	34408.92
2015	44000	0.691556	30428.48
2016	44000	0.611557	26908.5
2017	44000	0.540812	23795.71
			154451.7
Add: Present value of redemption {(20000 x 26.40) x 0.540812}			285548.6
			440000.2

	Amortized costs:
	Present value of investment	440000
	Life of investment	5 years
	Annual amortized costs (440000 /5)	88000

Number of shares (440000 /22)

20000

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