Case studies on Financial Instruments

QUESTION 1
Scope of Financial instruments
Freetown Limited sold goods to a customer on two-year interest-free credit. The
customer is to pay N1,000,000 in two years time. The cash price of the goods is
N800,000.
What does Section 11 say about these transactions?
How should this transaction be treated in the books of the seller?
QUESTION 2
Amortised cost for a five-year loan using the effective interest method.
On 1 January 20X0, Jay ltd acquires a bond for Currency Units N900, incurring
transaction costs of N50. Interest of N40 is receivable annually, in arrears, over the
next five years (31 December 20X031 December 20X4). The bond has a
mandatory redemption of N1,100 on 31 December 20X4.
Is the bond a financial asset or a financial liability to Jay Ltd?
How should Jay ltd account for the Bond?
QUESTION 3
Impairment indicators
Give three examples which indicate an objective evidence of impairment of a
financial asset and another three indicators of impairment for property, plant and
equipment or a cash generating unit.
QUESTION 4
Derecognition of financial assets
An entity sells a group of its accounts receivable to a bank at less than their face
amount. The entity continues to handle collections from the debtors on behalf of the
bank, including sending monthly statements, and the bank pays the entity a
market-rate fee for servicing the receivables. The entity is obliged to remit promptly
to the bank any and all amounts collected, but it has no obligation to the bank for
slow payment or non-payment by the debtors.

QUESTION 5
Derecognition of financial assets

The facts are the same as the preceding question except that the entity has agreed
to buy back from the bank any receivables for which the debtor is in arrears as to
principal or interest for more than 120 days.
QUESTION 6:
Compound financial instrument
Complex Bank Plc issues 2,000 convertible bonds at the start of year 1. The bonds
have a three-year term, and are issued at par with a face value of N1,000 per bond,
giving total proceeds of N2,000,000. Interest is payable annually in arrears at a
nominal annual interest rate of 6 per cent. Each bond is convertible at any time up
to maturity into 250 ordinary shares. When the bonds are issued, the prevailing
market interest rate for similar debt without conversion options is 9 per cent.
Determine the liability and equity component of the convertible bond.
QUESTION 7: Impairment of Assets
An entity owns a property which was originally purchased for N300,000. The
property has been revalued to N500,000 with the revaluation of N200,000 being
recognised as other comprehensive income and recorded in the revaluation reserve.
The property has a current carrying value of N460,000 but the recoverable amount
of the property has just been estimated at only N200,000.
What is the amount of impairment and how should this be treated in the financial
statements?
QUESTION 8: Componentisation
At January 1, 2003, company D purchases a building; the cost of the building
amount to N 1,000,000. An analysis shows that the building can be divided into five
independent components: the roof, the lift, the security system, the bricking and
the rest of the building (rest).
The company decides that the roof has to be replaced every 10 years, the security
system and the lift each after 5 years. The rest of the building can be used over 40
years without any major refurbishments.
The company uses the component approach. The costs of the components of the
building are as follows:
Roof

N 200.000

Lift

N 100.000

Security system
Bricking
Rest

20.000

N 400.000
N 280.000

N1.000.000
Determine the Carrying amount of the building at 31 Dec 2004.
What would have been the carrying amount if component approach was not
applied?