Question

In: Accounting

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

Solutions

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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