Part (a) - Classification of Preference Shares
**Memorandum**
To: Financial Manager, HOL Ltd
From: [Your Name]
Subject: Classification of Preference Shares
Date: [Current Date]
The convertible preference shares issued by HOL Ltd on 30 June 2024 should be classified considering
the mandatory dividend payments and the conversion feature into ordinary shares. Given the specifics,
particularly the mandatory nature of the dividend payments, these shares likely contain a liability
component (the dividend payments) and an equity component (the conversion feature into ordinary
shares).
According to IAS 32 Financial Instruments: Presentation, a financial instrument should be classified as a
liability if it contains a contractual obligation to deliver cash or another financial asset. In this case, the
mandatory dividend payments suggest a liability component. However, the conversion feature into a
fixed number of ordinary shares suggests an equity component.
Given the conversion feature into equity, we need to determine if the instrument should be classified as
a compound financial instrument, with both liability and equity components. The liability component
would represent the present value of the mandatory dividend payments, and the equity component
would represent the conversion feature.
Based on the specifics, it appears that the preference shares would likely be classified as a compound
financial instrument, with both liability and equity components.
**Calculation:**
, FAC3764 ASSIGNMENT 3
PART A
Assuming the issue price of R2 per preference share and 1,000 shares issued, the total proceeds would
be R2,000. The liability component would be calculated as the present value of the mandatory dividend
payments, and the equity component would be the residual amount.
Let's assume a discount rate of 8% per annum, and the conversion date is 4 years from the issue date.
The present value of the dividend payments would be:
Year 1: R160 (R2,000 x 8%) / (1 + 0.08)^1 = R148.15
Year 2: R160 / (1 + 0.08)^2 = R137.17
Year 3: R160 / (1 + 0.08)^3 = R126.94
Year 4: R160 / (1 + 0.08)^4 = R117.45
Total present value of dividend payments = R529.71
Liability component = R529.71
Equity component = R2,000 - R529.71 = R1,470.29
**Journal Entry:**
Dr: Cash (SFP) = R2,000
Cr: Liability Component (SFP) = R529.71
Cr: Equity Component (Equity) = R1,470.29
(b) - Leave Pay Accrual Journal Entry
**Memorandum**
To: Financial Manager, HOL Ltd
From: [Your Name]
Subject: Classification of Preference Shares
Date: [Current Date]
The convertible preference shares issued by HOL Ltd on 30 June 2024 should be classified considering
the mandatory dividend payments and the conversion feature into ordinary shares. Given the specifics,
particularly the mandatory nature of the dividend payments, these shares likely contain a liability
component (the dividend payments) and an equity component (the conversion feature into ordinary
shares).
According to IAS 32 Financial Instruments: Presentation, a financial instrument should be classified as a
liability if it contains a contractual obligation to deliver cash or another financial asset. In this case, the
mandatory dividend payments suggest a liability component. However, the conversion feature into a
fixed number of ordinary shares suggests an equity component.
Given the conversion feature into equity, we need to determine if the instrument should be classified as
a compound financial instrument, with both liability and equity components. The liability component
would represent the present value of the mandatory dividend payments, and the equity component
would represent the conversion feature.
Based on the specifics, it appears that the preference shares would likely be classified as a compound
financial instrument, with both liability and equity components.
**Calculation:**
, FAC3764 ASSIGNMENT 3
PART A
Assuming the issue price of R2 per preference share and 1,000 shares issued, the total proceeds would
be R2,000. The liability component would be calculated as the present value of the mandatory dividend
payments, and the equity component would be the residual amount.
Let's assume a discount rate of 8% per annum, and the conversion date is 4 years from the issue date.
The present value of the dividend payments would be:
Year 1: R160 (R2,000 x 8%) / (1 + 0.08)^1 = R148.15
Year 2: R160 / (1 + 0.08)^2 = R137.17
Year 3: R160 / (1 + 0.08)^3 = R126.94
Year 4: R160 / (1 + 0.08)^4 = R117.45
Total present value of dividend payments = R529.71
Liability component = R529.71
Equity component = R2,000 - R529.71 = R1,470.29
**Journal Entry:**
Dr: Cash (SFP) = R2,000
Cr: Liability Component (SFP) = R529.71
Cr: Equity Component (Equity) = R1,470.29
(b) - Leave Pay Accrual Journal Entry
