Page 10 - 23. COMPILER QB - IND AS 109_32

Journal entry to recognize gain/loss
Bond (Rs 47,700 – Rs 40,000) Dr. 7,700

Bank (Interest received) Dr. 2,65
5
To Interest Income (P & L) 4,200

To Exchange gain (P & L) 5,300
To OCI (fair value gain) 855

Q6 (RTP - May 20 & MTP March 21 – 5 Marks)
XYZ issued Rs 4,80,000 4% redeemable preference shares on 1st April 20X5 at par. Interest is paid annually
in arrears, the first payment of interest amounting Rs 19,200 was made on 31st March 20X6 and it is debited

directly to retained earnings by the accountant. The preference shares are redeemable for a cash amount of Rs
7,20,000 on 31st March 20X8. The effective rate of interest on the redeemable preference shares is 18% per
annum. The proceeds of the issue have been recorded within equity by the accountant as this reflects the
legal nature of the shares. Board of directors intends to issue new equity shares over the next two years to

build up cash resources to redeem the preference shares.
Mukesh, Accounts manager of XYZ has been told to review the accounting of aforesaid issues. CFO has asked
from Mukesh the closing balance of preference shares at the year end. If you were Mukesh, then how much
balance you would have shown to CFO on analysis of the stated issue. Prepare necessary adjusting journal
entry in the books of account, if required.

SOLUTION
The preference shares provide the holder with the right to receive a predetermined amount of annual dividend
out of profits of the company, together with a fixed amount on redemption.

Whilst the legal form is equity, the shares are in substance debt. The fixed level of dividend is interest and
the redemption amount is equivalent to the repayment of a loan.
Under Ind AS 32 ‘Financial Instruments: Presentation’ these instruments should be classified as financial
liabilities because there is a contractual obligation to deliver cash. The preference shares should be accounted
for at amortised cost using the effective interest rate of 18%.

Year 1 April, 20X5 Rs Interest @18% Paid at 4% 31 March, 20X6
Rs Rs Rs
20X5-20X6 480,000 86,400 (19,200) 547,200

Accordingly, the closing balance of Preference shares at year end i.e. 31st March, 20X6 would be Rs 5,47,200.
Accountant has inadvertently debited interest of Rs 19,200 in the profit and loss. However, the interest of Rs
86,400 should have been debited to profit and loss as finance charge.
Similarly, amount of Rs 5,47,200 should be included in borrowings (non-current liabilities) and consequently,
Equity should be reduced by Rs 480,000 proceeds of issue and Rs 67,200 (86,400 – 19,200) i.e. total by

5,47,200.
Necessary adjusting journal entry to rectify the books of accounts will be:
Rs Rs Remarks
Preference share capital (equity) (Balance sheet) Dr. 4,80,000

Finance costs (Profit and loss) Dr. 86,400 actual cost
23. 9