Financial Accounting Theory and Practice

Module - Accounting for Financial Instruments

Question 1 -

If a financial instrument is classified as debt rather than equity, explain what consequences this will have on reported profit.

Question 2 -

Jones Ltd has the following statement of financial position as at 30th June 2016:

Statement of financial position before set-off

Loans payable               $   300,000                 Loans Receivable           $ 500,000

Shareholders' funds       $1,000,000                 Non-current assets         800,000

                                    $1,300,000                                                     $1,300,000

Jones Ltd has an amount owing to Blue Ltd of $100 000 and an amount receivable from Blue Ltd of $400 000.

Required:

(i) Assuming a right of set-off exists; prepare the post set-off statement of financial position for Jones Ltd.

(ii) What would be the impact on the debt to asset ratio and the debt to equity ratio? What advantage does this right to set-off provide for Jones Ltd?

Question 3 -

Jackson Brown has 2,000 shares in Billie Ltd. The current price is $45 per share. Jackson will need to sell these shares in 9 months when he retires.  Jackson is nervous about the price fluctuations over the next 9 months, and decides to enter a future contract on Billie Ltd shares, in which he takes a sell position. The price of the future is $45.50 and the contract is for 2,000 futures.

Nine months later, the price of Billie Ltd shares has fallen to $40.00 and the market price of a future with Billie Ltd is now $42.00.

1. Calculate the total gains and losses Jackson will receive for the above transactions. Show all your workings.

2. Explain the reason why Jackson would have entered into a futures contract. Would Jackson have been in a better financial position if he hadn't taken out the futures contract? Why? (Show all your workings to explain your answer).