You are an audits senior in firm of Chartered Accountants, Paterson and Co. It is February 20X7

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Question:

You are an audits senior in firm of Chartered Accountants, Paterson and Co. It is February 20X7 and you are currently reviewing the draft financial statements of ABC Group which is client of your firm.

ABC Plc is conglomerate group, compromising a number of subsidiary companies in which control is exercised by the group parent company, ABC Holdings Limited. The shares of ABC Plc are listed on Dublin and London Stock Exchanges. A Number of Accounting Issues have risen in respect of the audit of the ABC Group for the year ended Dec 31, 20X6 .

Issue: Financial Instruments
(i) Loan Stock
ABC Plc purchased loan stock in Moni limited for Euro 10 million on 1 January 20X6. The loan stock carries no coupon and will be redeemed on 31 December 20X8 for Euro 13,310,000. The Loan stock was purchased with the intention of being held to maturity by ABC Plc. The effective interest rate is 10% per annum . No other factor affect the contractual cash flows.

(ii) Purchase and disposal of shares ABC Plc purchased shares in Smile Plc for Euro 85 million January 1, 20X6. The shares are held for trading At 31 December 20X6, ABC Plc has an entitlement to Euro 3 million in respect of dividends declared by Smile Plc in November 20X6. The shares held by ABC Plc had a fair value of Euro 97 million at 31 December 20X6; they were sold for Euro 103 million in February 20X7.

At ABC Ltd for cases (i) and (ii) :
1) Determine and explain the classification of financial assets for ABC Plc's investment in loans stock and shares in Smile Plc.
2) Describe the accounting treatment of ABC Plc's investment in loan stock and shares in Smile Plc. Make the related journal entry for the year 20X6
3) Journalize the sale of investment stock in Smile Plc in 20X7
4) Describe the presentation for the investment-related accounts in loan stock and stock in Smile Plc on the statement of financial position and statement of comprehensive income ABC Plc for the year ended December 31, 19X6.