Epsilon prepares financial statements to 31 March each year. The following events have occurred which are relevant to the year ended 31 March 2018: (i) On 1 April 2017, Epsilon loaned $30 million to another entity. Interest of $1·5 million is payable annually in arrears. An additional final payment of $35·3 million is due on 31 March 2020. Epsilon incurred direct costs of $250,000 in arranging this loan. The annual rate of interest implicit in this arrangement is approximately 10%. Epsilon has no intention of assigning this loan to a third party at any time. (ii) On 1 April 2017, Epsilon purchased 500,000 shares in a key supplier – entity X. The shares were purchased in order to protect Epsilon’s source of supply and Epsilon has no intention of trading in these shares. The shares cost $2 per share and the direct costs of purchasing the shares were $100,000. On 1 January 2018, the supplier paid a dividend of 30 cents per share. On 31 March 2018, the fair value of a share in entity X was $2·25. (iii) On 1 January 2018, Epsilon purchased 100,000 call options to purchase shares in entity Y – an unconnected third party. Each option allowed Epsilon to purchase shares in entity Y on 31 December 2018 for $6 per share. Epsilon paid $1·25 per option on 1 January 2018. On 31 March 2018, the fair value of a share in entity Y was $8 and the fair value of a share option purchased by Epsilon was $1·60. This purchase of call options is not part of a hedging arrangement. Required: Explain and show how the three events should be reported in the financial statements of Epsilon for the year ended 31 March 2018. You should assume that Epsilon only measures financial assets at fair value through profit or loss when required to do so by IFRS 9
Epsilon prepares financial statements to 31 March each year. The following events have occurred which are relevant to the year ended 31 March 2018:
(i) On 1 April 2017, Epsilon loaned $30 million to another entity. Interest of $1·5 million is payable annually in arrears. An additional final payment of $35·3 million is due on 31 March 2020. Epsilon incurred direct costs of $250,000 in arranging this loan. The annual rate of interest implicit in this arrangement is approximately 10%. Epsilon has no intention of assigning this loan to a third party at any time.
(ii) On 1 April 2017, Epsilon purchased 500,000 shares in a key supplier – entity X. The shares were purchased in order to protect Epsilon’s source of supply and Epsilon has no intention of trading in these shares. The shares cost $2 per share and the direct costs of purchasing the shares were $100,000. On 1 January 2018, the supplier paid a dividend of 30 cents per share. On 31 March 2018, the fair value of a share in entity X was $2·25.
(iii) On 1 January 2018, Epsilon purchased 100,000 call options to purchase shares in entity Y – an unconnected third party. Each option allowed Epsilon to purchase shares in entity Y on 31 December 2018 for $6 per share. Epsilon paid $1·25 per option on 1 January 2018. On 31 March 2018, the fair value of a share in entity Y was $8 and the fair value of a share option purchased by Epsilon was $1·60. This purchase of call options is not part of a hedging arrangement.
Required:
Explain and show how the three events should be reported in the financial statements
of Epsilon for the year ended 31 March 2018. You should assume that Epsilon only measures financial assets at fair value through profit or loss when required to do so by IFRS 9
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
