BoltNut Ltd ('BoltNut') is a company listed on the alternative exchange (AltX) of the JSE Securities Exchange. BoltNut manufactures and supplies specialised nuts and bolts to the construction industry.
BoltNut has a 31 December year end.
Investment activities
In 2006 the directors decided to investigate alternative investment opportunities for the surplus cash that BoltNut was generating at the time.
The directors were advised to use their surplus cash to purchase listed bonds in Welendtoanyone Inc. ('Welendtoanyone'). These bonds are traded on an active market located in New York, USA. BoltNut had the intention and ability to hold the bonds to maturity.
The directors decided to purchase the bonds on the following terms:
Transaction date 15 February 2006
Maturity date 31 December 2010
Interest coupon 8% per annum
Interest coupon date 31 December
Nominal value per bond US $10 000
Number of bonds purchased 100
Purchase price per bond US $10 000
Redemption At nominal value
The following spot exchange rates applied to the above-mentioned listed bonds:
Date US $ spot rate
15 February 2006 US $1 : R6,0742
31 December 2006 US $1 : R7,0461
31 December 2007 US $1 : R6,8618
31 December 2008 US $1 : R11,0695
The following average exchange rates applied to the bonds:
Date US $ average rate
1 January 2008 to 31 December 2008 US $1 : R8,3045
Interest coupons had been received by BoltNut on time until 31 December 2007 and there was no indication of impairment at that date. However, from 31 December 2008 the interest received from Welendtoanyone was significantly less than the contractual interest coupon due on the bonds. The market rate of interest (yield) applicable to the bonds at 31 December 2008 was 10,8% per annum.
On 31 January 2009, during the year-end audit, the directors called an urgent meeting with the audit partner responsible for the BoltNut audit to inform him that they had received notice from Welendtoanyone that the company was in financial distress.
The directors of BoltNut provided the audit partner with the following information in respect of the investment in Welendtoanyone bonds:
Capital Interest TotaDate of cash flow l
US $ US $ US $
31 December 2008 (actual) 0 44 000 44 000
31 December 2009 (expected) 0 18 000 18 000
31 December 2010 (expected) 400 000 44 000 444 000
Ignore all tax implications.
REQUIRED
Marks
(a) Prepare an analysis detailing whether the investment in Welendtoanyone Inc. may be classified into the following categories in terms of IAS 39, Financial instruments: recognition and measurement.
Provide your answer in the following format:
Classification option Applicable to bond
(yes / no) Reasons
Held for trading
Held to maturity
Loans and receivables
Available for sale
(b) Assuming that management has classified the bonds as held to maturity,provide the journal entries that BoltNut Ltd must pass in respect of its investment in Welendtoanyone Inc. for the year ended 31 December 2008.
Journal narrations are NOT required.
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Presentation marks: Arrangement and layout, clarity of explanation, logical argument and language usage.
2
A table of present value factors for various interest rates and/or discount rates for varying periods is included on the next page.
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PRESENT VALUE TABLE
Present value interest factors for R1,00 discounted at various rates for varying periods
Interest ratPeriod e
4,00% 6,00% 8,00% 10,00% 10,80%
1 0,9615 0,9434 0,9259 0,9091 0,9025
2 0,9426 0,8900 0,8573 0,8264 0,8146
3 0,8890 0,8396 0,7938 0,7513 0,7352
4 0,8548 0,7921 0,7350 0,6830 0,6635
5 0,8219 0,7473 0,6806 0,6209 0,5988
6 0,7903 0,7050 0,6302 0,5645 0,5405
7 0,7599 0,6651 0,5835 0,5132 0,4878
8 0,7307 0,6274 0,5403 0,4665 0,4402
9 0,7026 0,5919 0,5002 0,4241 0,3973
10 0,6756 0,5584 0,4632 0,3855 0,3586