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FINANCIAL INSTRUMENTS UNIT 8

The document discusses various scenarios involving the derecognition of financial liabilities, including modifications to bond terms and loan settlements. It provides specific examples of companies like XYZ Ltd. and JK Ltd. that alter their debt agreements due to changing financial circumstances. Additionally, it outlines the implications of these modifications on interest rates, repayment terms, and associated costs.

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17 views4 pages

FINANCIAL INSTRUMENTS UNIT 8

The document discusses various scenarios involving the derecognition of financial liabilities, including modifications to bond terms and loan settlements. It provides specific examples of companies like XYZ Ltd. and JK Ltd. that alter their debt agreements due to changing financial circumstances. Additionally, it outlines the implications of these modifications on interest rates, repayment terms, and associated costs.

Uploaded by

rajeevs3130
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIT 8: DERECOGNITION OF FINANCIAL LIABILITIES

QUESTION NO 97

On 1 January 20X0, XYZ Ltd. issues 10 year bonds for ` 10,00,000, bearing interest
at 10% (payable annually on 31st December each year). The bonds are redeemable
on 31 December 20X9 for ` 10,00,000. No costs or fees are incurred. The effective
interest rate is therefore 10%. On 1 January 20X5 (i.e. after 5 years) XYZ Ltd.
and the bondholders agree to a modification in accordance with which:

• the term is extended to 31 December 2011;

• Interest payments are reduced to 5% p.a.;

• the bonds are redeemable on 31 December 20Y1 for ` 15,00,000; and

• legal and other fees of ` 1,00,000 are incurred.

XYZ Ltd. determines that the market interest rate on 1 January 20X5 for
borrowings on similar terms is 11%.

QUESTION NO 98

On 1 January 20X0, XYZ Ltd. issues 10 year bonds for ` 1,000,000, bearing

interest at 10% (payable annually on 31st December each year). The bonds

are redeemable on 31 December

20X9 for ` 1,000,000. No costs or fees are incurred. The effective interest
rate is therefore 10%. On 1 January 20X5 (i.e. after 5 years) XYZ Ltd. and
the bondholders agree to a modification in accordance with which:

no further interest payments are made

the bonds are redeemed on the original due date (31 December 20X9) for `
1,600,000;

LEGAL fees will be 50,000 on the date of modification

NEW IRR 10.99%


QUESTION NO 99

JK Ltd. has an outstanding unsecured loan of ` 90 crores to a bank. The effective


interest rate (EIR) of this loan is 10%. Owing to financial difficulties, JK Ltd. is
unable to service the debt and approaches the bank for a settlement.

The bank offers the following terms which are accepted by JK Ltd.:

• 2/3rd of the debt is unsustainable and hence will be converted into 70% equity
interest in JK Ltd. The fair value of net assets of JK Ltd. is ` 80 crores.

• 1/3rd of the debt is sustainable and the bank agrees to certain moratorium
period and decrease in interest rate in initial periods. The present value of cash
flows as per these revised terms calculated using original EIR is ` 25 crores. The
fair value of the cash flows as per these revised terms is ` 28 crores.

QUESTION NO 100

Wheel Co. Limited borrowed ` 500,000,000 from a bank on 1 January 20X1. The
original terms of the loan were as follows:

Interest rate: 11%

Repayment of principal in 5 equal instalments

Payment of interest annually on accrual basis

Upfront processing fee: ` 5,870,096

Effective interest rate on loan: 11.50%

On 31 December 20X2, Wheel Co. Limited approached the bank citing liquidity
issues in meeting the cash flows required for immediate instalments and re-
negotiated the terms of the loan with banks as follows:

• Interest rate 15%

• Repayment of outstanding principal in 10 equal instalments starting 31 December 20X3

• Payment of interest on an annual basis


Record journal entries in the books of Wheel Co. Limited on 31 December 20X

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