You are the newly appointed auditor of Keeptrying Ltd, charged with the responsibility of ensuring

 
   

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You are the newly appointed auditor of Keeptrying Ltd, charged with the responsibility of ensuring that the equity and liabilities section of the balance sheet is fairly reflected. The following extract from the draft balance sheet and additional information relevant to the current financial year ended 31 December 20X4 has been given to you:

BALANCE SHEET AS AT 31DECEMBER 20X4

20X4

20X3

(EXTRACTS)

C

C

Issued share capital

Ordinary share capital: Cl shares

100 000

100 000

Preference share capital: 10% cumulative, redeemable Cl shares

300 000

300 000

Additional information:

100 000 ordinary shares of Cl each were issued on 1January 20X1.

300 000 redeemable preference shares, each with a coupon rate of 10% and a par value of Cl were issued on 1 January 20X3. These shares are compulsorily redeemable on 31 December 20X5 at a premium of CO.10 per share. The effective interest rate is 12.937%.

The preference dividends are declared and paid on 31 December each year.

• Journal entries processed to date in respect of the preference shares are as follows:

Dr

Cr

1January 20X3

Bank

300 000

Preference shares

300 000

Issue of preference shares

31December 20X3

Preference dividend

30 000

Bank

30 000

Payment of preference dividend

31December 20X4

Preference dividend

30 000

Bank

30 000

Payment of preference dividend

• All amounts are considered to be material.

Required:

Provide the following definitions (per the Framework):

i) Liability

ii) Equity

iii) Expense

a)

b) Discuss the recognition of the following transactions:

i) The issue of the preference shares in terms of the liability and equity definitions.

ii) The redemption of the preference shares (that is, the payment of C330 000 on

31 December 20X5) in terms of the expense definition.

Calculate the balance at which the preference shares should be measured in the balance

sheet of KeeptryingLtd as at 31December 20X4.

Provide the correcting journal entries where considered appropriate.

c)

d)

Ignore taxation.