QUESTION Hypertrans Ltd is a listed ...

QUESTION
Hypertrans Ltd is a listed company. The financial director of Hypertrans Ltd approached you for advice, since
you are a technical advisor in the technical department of Heads, Laing and Serobe Incorporated.
The following issues have been referred to you for advice:
The accountant of Hypertrans Ltd calculated a provisional profit before taxation of R9m. Certain aspects of the
items listed below were not yet taken into account:
1. On 1 August 20.6, Hypertrans Ltd borrowed R10m from a financial institution by way of a bond. This
bond was issued at a 15% discount, has a 9,25% coupon rate (payable annually in arrears) and is
repayable in total on 31 July 20.8. Hypertrans Ltd incurred legal and other expenses of R500 000 whilst
arranging this bond. Interest incurred on the bond was not taken into account in the provisional profit
before tax of R9m.
2. On 1 April 20.5 Hypertrans Ltd issued 5 000 10% R100 bonds convertible, at the option of the holder, on
31 March 20.9. Each block of five bonds could be converted into 60 ordinary shares at that date. A fair
interest rate on similar bonds (without the conversion option) at 1 April 20.5 was 12% per annum and is
currently 14% per annum. Bonds are secured by a mortgage over land and buildings. Only the interest
paid in cash has been included in the calculated provisional profit before tax of R9m.
3. On 1 April 20.6, Hypertrans Ltd issued 100 000 cumulative preference shares of R5 each. Preference
dividends of 10% are payable annually on 31 March. The preference shares are redeemable on 31
March 20.9 at a premium of 10%.
4. The following investments have not yet been accounted for in the current year and are reflected
in the financial records at the amounts as indicated.
Cost
Listed shares
Unlisted shares
R
112 000
115 000
Market/directors
value 31/3/20.6
R
114 000
118 000
Market/directors
value 31/3/20.7
R
117 000
116 000
Both the listed and unlisted shares form part of a held for trading portfolio. All investments on hand at
31 March 20.6 were on hand at 31 March 20.7.
5. On 1 October 20.6 Hypertrans Ltd granted a loan of R500 000 to one of it’s senior employees. The loan
bears interest at a rate of 5% per annum compounded annually and is repayable with interest on 30
September 20.10. If the employee had borrowed this money from a commercial bank he would have had
to pay interest of 15% per annum.
6. On 1 July 20.6 Hypertrans Ltd purchased government bonds at a discount of 8% of the face value. The
face value of the government bonds is R300 000. A coupon rate of 11% per annum is payable in arrears
on 1 January and 1 July. The government bonds will be repaid on 30 June 2010 at face value.
Transaction costs amounted to R3 500. Hypertrans Ltd intends to hold this investment to maturity.
7. On 1 April 20.5 Hypertrans Ltd grants 100 share options to each of its 200 employees. These options will
vest on 31 March 20.7, provided that the employees remain in Hypertrans Ltd’s service, and provided
that turnover increases by at least 8% per annum. If turnover increase by a least 10% per annum an
additional 20 share options will be granted to each employee. At grant date the fair value of each option
is R10 (not taking into account vesting conditions on determining fair value). At this date it is estimated
that turnover will increase by 9% per annum over the next two years and that two employees will resign
during the two-year period. On 31 March 20.6 it is determined that turnover has increased by 12% during
the year. At this date the increase for the next year is estimated at 11%.
Two employees left during the 20.6 financial year and on 31 March 20.6 it is expected that another
employee will leave during the 20.7 financial year. At the end of 20.7 financial year the average increase
in turnover over the last two years amounted to only 8.5% per annum due to unexpected actions from
competitors. No employees left during the 20.7 financial year.
8. Included in creditors of R3 740 000 at 31 March 20.7 is a foreign creditor of R650 000 which was
measured at a six month forward cover rate of R6,50 per $1 expiring on 31 May 20.7. The creditor was
for goods delivered on 1 March 20.7 (transaction date) and was recorded at forward cover rate. The
goods were ordered on 30 November 20.6. 20% of these goods were sold up to reporting date for R200
000 and the rest of the goods are included in the total inventory of R4 900 100 at 31 March 20.7 The
applicable exchange rates were as follows:
Spot
30 Nov 20.6 (taking out forward cover)
1 Mar 20.7
31 Mar 20.7
$1 = R
6,40
6,60
6,65
Forward cover
rate expiring on
31 May 20.7
$1 = R
6,50
6,75
6,79
The hedging relationship is designated as being for changes in the fair value of the forward exchange
contract.
It is the policy of the company that all foreign exchange differences on cash flow hedges be recycled to
the statement of comprehensive income in the same period that the underlying asset affects the profit or
loss.
9. Ignore all tax implications
REQUIRED
(a) Prepare ALL the journal entries for the year ended 31 March 20.7, and
(b) Calculate the revised profit before taxation, of Hypertrans Ltd, for the year ended 31 March 20.7
SOLUTION
Dr
Cr
Profit (given)
1
2
3
4
5
6
7
8
Bank
Other FL – bond
Other FL – bond
Bank
Interest paid – bond
Accrued expense / Other FL – bond
Interest paid
Other FL - convertible bonds
Bank
Bank
Other FL - cum preference shares
Interest paid
Bank
Other FL – cum preference shares
Listed investments
FV adjustment (IS)
FV adjustment (IS)
Unlisted investments
8 500 000
8 500 000
500 000
500 000
1 214 933
1 214 933
57 118
(1 214 933)
(7 118)
7 118
50 000
500 000
500 000
64 700
(64 700)
50 000
14 700
3 000
3 000
3 000
2 000
(2 000)
2 000
Loan
Employee costs
Bank
Loan
Interest received
347 485
152 515
HTM – govt bond
Bank
Bank
HTM – govt bond
Interest received
Accrued income
Interest received
279 500
Employee costs
Share based payment reserve (equity)
R
9 000 000
(152 515)
500 000
26 061
26 061
26 061
279 500
16 500
2 031
2 031
18 531
9 333
9 333
79 800
9 333
(79 800)
79 800
Tx date = no entry
FEC asset
CH Hedge reserve (equity)
Inventory
Creditor
Forex loss
Creditor
FEC asset
Forex gain
Cost of sales
Inventory
CF Hedge reserve (equity)
Forex gain
REVERSE COS RECOGNISED BY CLIENT
REVISED PROFIT
25 000
25 000
660 000
660 000
5 000
(5 000)
5 000
4 000
4 000
132 000
4 000
(132 000)
132 000
5 000
5 000
5 000
130 000
7 521 359