On the 1 January 20X6 Mich Limited issued 1000 000 CIO par value fixed rate 10% compulsory redeemable preference shares at par value. The preference shares are compulsory redeemable at C15 each on the 31 December 20X10. Preference dividends are paid annually in arrears on the 31 December.

The ex-dividend market value of the preference shares was as follows:

Date	Market price (C)
31December 20X6	11
31December 20X7	12
31 December 20X8	9
31December 20X9	14
31December 20X10	15

The effective interest rate is 17.11239%.

Kim Limited purchased all 1000 000 preference shares on 1 January 20X6.

Required:

a) Discuss the possible methods that Kim Limited could apply in accounting for its financial asset (i.e. its investment in Mich Limited’s preference shares).

b) Given the above ex-dividend market values of Mich Limited’s preference shares, prepare the journal entries in KimLimited’s general journal assuming that Kim Limited considers its investment to be:

i) Designated as fair value through profit or loss;

ii) Held to maturity;

iii) Available for sale.

c) Assuming that Kim Limited earned other profit in each year (i.e. before considering any income related to the financial instruments) of Cl 000 and assuming that Kim Limited designated the investment in the Mich Limited preference shares as available for sale, prepare the:

• Statement of comprehensive income; and

• Statement of changes in equity. Ignore tax.

d) Repeat part (c) assuming that the tax rate is 30%.

Answer rating: 100% (QA)

a The base stock strategy is a valuation procedure for th... View the full answer