Question 1:

On 1 June 20X4, Kredco sold goods on credit to Detco for $200,000. Detco has a credit limit with Kredco
of 60 days. Kredco applies IFRS 9, and uses a pre-determined matrix for the calculation of allowances for
receivables as follows.

Expected loss
Days Overdue provision

Nil 1%
1 to 30 5%
31 to 60 15%
61 to 90 20%
90 + 25%

Detco had not paid by 31 July 20X4, and so failed to comply with its credit term, and Kredco learned that
Detco was having serious cash flow difficulties due to a loss of a key customer. The finance controller of
Detco has informed Kredco that they will receive payment.

Ignore sales tax.

Required:
Show the accounting entries on 1 June 20X4 and 31 July 20X4 to record the above, in accordance with
IAS 39 and the expected credit loss model in IFRS 9.

Question 2:

Redblack Co has a customer base consisting of a large number of small clients. At 30 June 20X4, it has a
portfolio of trade receivables of $60 million. Redblack applies IFRS 9, using a provision matrix to determine
the expected credit losses for the portfolio. The provision matrix is based on its historical observed default
rates, adjusted for forward looking estimates. The historical observed default rates are updated at every
reporting date.

At 30 June 20X4, Redblack estimates the following provision matrix.

Expected default
Rate Gross carrying
Amount Credit loss allowance
Default rate × gross
carrying amount
$’000 $’000
Current 0.3% 30,000 90
1 to 30 days overdue 1.6% 15,000 240
31 to 60 days overdue 3.6% 8,000 288
61 to 90 days overdue 6.6% 5,000 330
More than 90 days overdue 10.6% 2,000 212
60,000 1,160

At 30 June 20X5, Redblack has a portfolio of trade receivables of $68 million. The company revises its
forward looking estimates and the general economic conditions are deemed to be less favourable than
previously thought. The partially competed provision matrix is as follows.
 Expected default rate Gross carrying amount
$’000
Current 0.5% 32,000
1 to 30 days overdue 1.8% 16,000
31 to 60 days overdue 3.8% 10,000
61 to 90 days overdue 7% 7,000
More than 90 days overdue 11% 3,000
68,000

Required
Complete the provision matrix for Redblack at 30 June 20X5 and show the journal entries to record the
credit loss allowance. What would be the accounting treatment if the company follows IAS 39.

Question 3:

In January 20X6 Wolf purchased 10 million $1 listed equity shares in Hall at a price of $5 per share.
Transaction costs were $3m. Wolf’s year end is 30 November.

At 30 November 20X6, the shares in Hall were trading at $6.50. On 31 October 20X6 Wolf received a
dividend from Hall of 20c per share.

Show the financial statement extracts of Wolf at 30 November 20X6 relating to the investment in Hall on
the basis that:

(i) The shares were bought for trading

(ii) The shares were bought as a source of dividend income and were the subject of an irrevocable election
at initial recognition to recognise them at fair value through other comprehensive income.

Question 4:

The directors of Aron would like advice with regards some financial instrument transactions that took place
during the year ended 31 May 20X7.

(i) Aron issued one million convertible bonds on 1 June 20X6. The bonds had a term of three years and
were issued for their fair value of $100 million, which is also the par value. Interest is paid annually in arrears
at a rate of 6% per annum. Bonds without the conversion option attracted an interest rate of 9% per annum
on 1 June 20X6. The company incurred issue costs of $1 million. The impact of the issue costs is to increase
the effective interest rate to 9.38%. At 31 May 20X9 the bondholders can opt to be repaid the par value in
cash, or they can opt to receive a fixed number of ordinary shares in Aron.

(ii) Aron held 3% holding of the shares in Smart, a public limited company. The investment was designated
upon recognition as fair value through other comprehensive income and as at 31 May 20X7 was fair valued
at $5 million. The cumulative gain recognised in equity relating to this investment was $400,000. On the
same day, the whole of the share capital of Smart was acquired by Given, a public limited company, and
as a result, Aron received shares in Given with a fair value of $5.5 million in exchange for its holding in
Smart. The company wishes to know how the exchange of shares in Smart for the shares in Given should
be accounted for in its financial records.

(iii) On 1 June 20X6, Aron purchased $10 million of bonds at par. These bonds had been issued by Winston,
an entity operating in the video games industry. The bonds are due to be redeemed at a premium on 31
May 20X9, with Aron also receiving 5% interest annually in arrears. The effective rate of interest on the
bonds is 15%. Aron often holds bonds until the redemption date, but will sell prior to maturity if investments
with higher returns become available. Winston’s bonds were deemed to have a low credit risk at inception.
On 31 May 20X7, Aron received the interest due on the bonds. However, there were wider concerns about
the economic performance and financial stability of the video games industry. As a result, there has been
a fall in the fair value of bonds issued by Winston and similar companies. The fair value of the Aron’s
investment at 31 May 20X7 was $9 million. Nonetheless, based on Winston’s strong working capital
management and market optimism about the entity’s forthcoming products, the bonds were still deemed to
have a low credit risk. The financial controller of Aron calculated the following expected credit losses for the
Winston bonds as at 31 May 20X7:

12 month expected credit losses $0.2m

Lifetime expected credit losses $0.4m

Required:
Advise Aron on how to deal with the above transactions in the financial statements for the year ended 31
May 20X7.