Question Tag: Liability Component

a) IAS 2: Inventories prescribes the accounting treatment for inventories; it provides guidance on the determination of cost and its subsequent recognition as an expense, including any write-down to net realisable value. Mrs. Christiana Addo, the Managing Director of Malik LTD has a number of specific queries in relation to inventory and has asked you for professional advice in relation to IAS 2. Malik LTD’s closing inventory at 31 December 2024 is GH₵345,000. This includes GH₵4,600 for items accidentally destroyed on 31 December 2024 after the count was completed. Also included is GH₵2,900 which relates to the cost of inventory damaged in October 2024, which can be reworked at a cost of GH₵600 and which can then be sold for GH₵2,400.

Required:

i) Identify FOUR situations in which net realisable value is likely to be less than cost.

ii) Calculate the closing value of inventory at 31 December 2024 and show how it should be accounted for in the statement of financial position and the statement of profit or loss.

b) IAS 23: Borrowing Costs sets out the conditions under which borrowing costs should be capitalised or expensed. On 1 August 2023, Fausty PLC commenced construction of a factory building for its own use. On the same date it issued a 5% loan notes for GH₵40 million. The entire proceeds of the loan notes were used immediately to pay for the land and to purchase building materials for the project. Construction work commenced on 1 October 2023 and continued throughout the year, except for a half-month break in December 2023 and a further half-month break in July 2024.

Required:

i) State the conditions under which borrowing costs can be capitalised.

ii) Calculate the amounts that should be capitalised as borrowing costs for the financial year end July 2024. (3 marks)

c) IAS 12: Income Taxes prescribes the accounting treatment of income taxes, including how to account for the current and future tax consequences of assets, liabilities and transactions recognised in the financial statements. IAS 12 requires entities reporting under IFRS to disclose certain items.

Required:

Identify THREE disclosure requirements of IAS 12. (3 marks)

d) Akweley LTD issued GH₵20 million of GH₵100 9% bonds at par on 1 January 2023. The maturity date of the bonds is 31 December 2026. At that date the bonds are redeemable at par or convertible to ordinary shares on the basis of 14 ordinary shares for each GH₵100 bond. The market interest rate for identical bonds with no conversion rights would have been 5.5% every six months. Coupon interest is paid in two instalments of 4.5% in arrears on 30 June and 31 December. The following are cumulative discount factors (which you should use where appropriate):

| | 4.5% | 5.5% | 9% | 11% | | 3 periods | 2.7490 | 2.6979 | 2.5313 | 2.4437 | | 4 periods | 3.5875 | 3.5052 | 3.2397 | 3.1024 | | 7 periods | 5.8927 | 5.6830 | 5.0330 | 4.7122 | | 8 periods | 6.5959 | 6.3346 | 5.5348 | 5.1461 |

Required: i) Determine the value of the liability component and the equity component of the bonds at 1 January 2023 (to the nearest GH₵1). ii) Determine the value of the liability component of the bonds at 31 December 2024 (to the nearest GH₵1).