QUESTION 4 (15 MARKS: 27 MINUTES) Hande Bhd sells and distributes medical supplies to hospitals and pharmacies. The company closes its accounts on 31 December each year and uses an effective interest method to amortise bond premium or discount. The following are the selected transactions on the books of Hande Bhd for the financial year 2019. Date Transaction 30 June The callable bonds issued with a nominal value of RM1,000,000, which were dated 1 July 2016, were matured and called at RM1,250,000 plus accrued interest to an effective yield of 4%. The bonds coupon rate was 6% and the interest was paid annually on 30 June. 1 September Sukuk-bonds with a par value of RM2,000,000, which mature in five years, were issued. The coupon rate is 6% with an effective yield of 8%. The interest is payable annually on 31 August REQUIRED: (Round all numbers to the nearest RM) (a) Determine the price of the (i) callable bonds and (ii) sukuk-bonds on the issuance date. Prepare the bond amortisation schedule for the callable bonds. (5 Marks) (b) Prepare all the related journal entries for Hande Bhd for the financial year 2019. (8 Marks) (c) Hande Bhd believes that financial liabilities such as bonds should not be measured at fair value but at amortised cost. Briefly explain whether the fair value option for financial liabilities is relevant for Hande Bhd. (2 Marks)
Question:
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Answer:
(c). Accounting for a financial liability at amortised cost means that the liability's effective rate of interest is charged as a finance cost to the statement of profit or loss (not the interest paid in cash) and changes in market rates of interest are ignored – ie the liability is not revalued at the reporting date. In simple terms this means that each year the liability will increase with the finance cost charged to the statement of profit or loss and decrease by the cash repaid.
As per IFRS 9, All financial liabilities are measured at amortised cost, except for financial liabilities at fair value through profit or loss. Such liabilities include derivatives (other than derivatives that are financial guarantee contracts or are designated and effective hedging instruments), other liabilities held for trading, and liabilities that an entity designates to be measured at fair value through profit or loss.
