Class Question 1 – AO5 - 2021

On 15 May 2021, Mrs Dunphy purchased 750 000 shares in Closets, Closets, Closets, Closets!
at R10.11 per share. A 100 000 of these shares were sold on 31 August for R14.76 each to meet
the ongoing cash requirements of the business. By 30 September 2021 – as predicted by Mr
Pritchett - the share price of Closets, Closets, Closets, Closets! closed at R15.67.

Additional information

 Grab-a-Bunch has a 30 September financial year-end.

 Grab-a-Bunch elected to apply the irrevocable election in IFRS 9.4.1.4 to its investments
in equity instruments.
 Assume a prime interest rate of 7% for the duration of the period.
 You may ignore tax and VAT.

REQUIRED FOR PRACTICAL CLASS

1. Prepare the journals

2. Prepare the T- Accounts – Ledger accounts
Question 2 – AO6 - 2021

Morticia Limited (Morticia) is a coal-mining company listed in the industrial sector of the
JSE Limited with a 30 September year end. This question comprises of two independent
parts.

Part A: Listed notes

On 1 October 2019 Morticia purchased 1 000 000 notes in a new issue from Gomez (Pty)
Limited (Gomez). The notes were issued at a discount of 5% on their face value of R20
per note (representing fair value on the issue date). The notes pay a semi-annual coupon
of 8% per annum and have a term of 3 years. When the notes were issued, Gomez had
a credit rating of AA. At 30 September 2020, the credit rating of Gomez had deteriorated
and was reset to CCC+ and remained unchanged until 30 September 2021. The entity
carries the listed notes at amortised cost.

According to the Morticia’s accounting policy, a significant credit risk is defined as a

deterioration of the credit rating to at least BBB+, default is defined as a deterioration of
the credit rating to at lease CCC+, and an instrument is written off when its credit rating
deteriorates to D.

Morticia has utilised the following probability of default (PD) and loss-given default (LGD)
rates from a credible source – Pugsley Ratings Agency - to determine the expected credit
losses on this instrument:

12 Month Lifetime
PD x PD x
PD LGD PD LGD
LGD LGD
AAA, AA+, AA, AA-, A+, A, A 0.60% 22.63% 0.14% 0.72% 27.16% 0.20%
BBB+, BBB, BBB-, BB+, BB, 4.50% 40.45% 1.82% 5.40% 48.54% 2.62%
BB-, B+, B
CCC+, CCC 26.76% 40.85% 10.93% 32.11% 49.02% 15.74%
D 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Other information

 The entity applies the the general approach to listed notes as allowed by IFRS 9
Financial instruments.
  Under the PD-LGD-EAD model, ECL is calculated by multiplying PD with LGD with
exposure at default (EAD), which is equal to the gross carrying amount (i.e. ECL
on notes = [PD x LGD] x EAD).

 Definition of terms

o PD = probability of default

o LGD = loss given default

o EAD = exposure at default, which is equal to the gross carrying amount

REQUIRED for practical class

Journalise the transactions up until 30 September 2021.

Trade receivables

Morticia earned R147 000 000 from credit sales during the 2021 financial year. According
to the debtors’ controller, Ms Wednesday, the debtors’ book comprises the following
balance:

Gross carrying Expected GCA Expected credit

amount (GCA) fully recoverable losses on GCA not
full recoverable
Current R12 250 000 80% 6%
30-days R6 125 000 70% 8%
60-days R3 675 000 60% 25%
90-days R1 825 000 35% 55%
Total R23 875 000

REQUIRED for practical class

Using a provision matrix, calculate the expected credit loss balance on trade receivables
as at 30 September 2021