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Good Juice has issued 2200 convertible debentures at their fair value of R1 000 each. The debentures have a face value of R1 000 and bear a fixed coupon interest rate of 9% per annum, compounded annually. The coupon interest is payable annually in arrears on 30 September. The debentures are convertible at the option of Good Juice on 30 September 2025, at a ratio of one ordinary share for every debenture held. Any debentures which are not converted on 30 September 2025 will be redeemed at their

"QUESTION 1 (40 marks) (72 Minutes) Good Juice Ltd (Good Juice), is a company that produces cold-pressed juices and is based in Cape Town, Western Cape. It has a 30 September year end and has experienced growth over the past two years despite lockdown restrictions. The following transactions took place in the current financial year. Debentures On 1 October 2020, Good Juice issued 2 200 convertible debentures at their fair value of R1 000 each. The debentures have a face value of R1 000 and bear a fixed coupon interest rate of 9% per annum, compounded annually. The coupon interest is payable annually in arrears on 30 September. The debentures are convertible at the option of Good Juice on 30 September 2025, at a ratio of one ordinary share for every debenture held. Any debentures which are not converted on 30 September 2025 will be redeemed at their face value on the same date. A market related interest rate for similar debentures without a conversion option is 11,5% per annum compounded annually. The financial accountant of Good Juice was unsure as to how to account for these debentures, and thus the only journal entry processed to account for the debentures was as follows:" Dr Cr 1 October 2020 R R Bank (SFP) 2 200 000 Debenture liability (SFP) 2 200 000 Proceeds received from the issue of debentures "Discuss, in terms of IAS 32, Financial Instruments: Presentation, the correct classification and initial measurement of the convertible debentures issued by Good Juice on 1 October 2020. Your discussion must include all relevant calculations. Communication skills – logical argument"

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The convertible debentures issued by Good Juice on 1 October 2020 are a financial instrument and are therefore classified as investments under IAS 32. The initial measurement of the debentures is R1 000 each and the couponinterest is 9% per annum, compounded annually.

"QUESTION 1 (40 marks) (72 Minutes) Good Juice Ltd (Good Juice), is a company that produces cold-pressed juices and is based in Cape Town, Western Cape. It has a 30 September year end and has experienced growth over the past two years despite lockdown restrictions. The following transactions took place in the current financial year. Debentures On 1 October 2020, Good Juice issued 2 200 convertible debentures at their fair value of R1 000 each. The debentures have a face value of R1 000 and bear a fixed coupon interest rate of 9% per annum, compounded annually. The coupon interest is payable annually in arrears on 30 September. The debentures are convertible at the option of Good Juice on 30 September 2025, at a ratio of one ordinary share for every debenture held. Any debentures which are not converted on 30 September 2025 will be redeemed at their face value on the same date. A market related interest rate for similar debentures without a conversion option is 11,5% per annum compounded annually. The financial accountant of Good Juice was unsure as to how to account for these debentures, and thus the only journal entry processed to account for the debentures was as follows:" Dr Cr 1 October 2020 R R Bank (SFP) 2 200 000 Debenture liability (SFP) 2 200 000 Proceeds received from the issue of debentures "Discuss, in terms of IAS 32, Financial Instruments: Presentation, the correct classification and initial measurement of the convertible debentures issued by Good Juice on 1 October 2020. Your discussion must include all relevant calculations. Communication skills – logical argument"

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If kumatima.com were to enter
into a 1-year contract with Air-motion at the current contract price of R168 million, it
would pay R172 million for the year. This option requires intense administration to
ensure that services are done on time and that the availability of resources and parts is also confirmed
timeously. The fixed costs associated with this option are as follows: R172 million x
1 year = R2,528 million. The senior administration clerk currently earning R500 000
per annum would

A. WORKING CAPITAL REQUIREMENTS (fleet servicing) kumatima.com is already months behind on its short-term obligations (salaries and other payables) and needs additional funds to source enough jet fuel and pay for monthly operating costs. Most of these costs cannot be easily restructured as the company usually enters into longterm contracts with the relevant parties. However, kumatima.com is considering restructuring its aircraft maintenance contracts in order to save money. Based on an analysis performed recently, the following are probabilities of the number of services to be conducted in total on the fleet of 25 aircraft for a year (routine service takes place every 1-3 days): Total number of services Probability 4 400 50% 8 900 20% 3 400 30% The two options available to kumatima.com are presented below: MAC3761 Test 4 - September 2022 5 TURN OVER CONFIDENTIAL Option A: Pay-as-you-go maintenance (service) Under this option, kumatima.com will only pay for the service done on each aircraft that goes in for maintenance. The recent analysis performed was mainly focused on this option (and kumatima.com has to make payment of R240 000 for this analysis to the consultant within the next 30 days). The average cost of one service is estimated at R36 500. This option requires intense administration to ensure that services are done on time and that the availability of resources and parts is also confirmed timeously. As a result, one full-time senior administration clerk currently working in Operations Department will be required to spend 20% of his time managing the maintenance schedule under this option. He currently earns R500 000 per annum. Option B: 1-year maintenance (service) plan kumatima.com has in the past entered into a fixed year-to-year contract with Air-motion (Pty) Ltd (also referred to as “Air-motion”) to service its entire fleet. However, there are concerns that this may not be as cost effective as Option A above (pay-as-you-go maintenance). Although the contract is signed upfront, payment is only made at the end of the contract term. kumatima.com has recently paid Air-motion R168 million under last year’s contract (inclusive of R8 million relating to late interest charged from the previous year). As kumatima.com is one of its highly valued clients, Air-motion always gives kumatima.com its Air-motion branded headphones to the fixed value of R1,25 million at no extra charge (the headphones are then sold to passengers to use on board at the same value). At the end of each year, kumatima.com has no headphones left in stock. Air-motion’s contract price increases by 4% year on year.

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Based on the analysis
performed, the probability of Air-motion conducting services on the fleet is as follows:

4 400 50%
8 900 20%
3 400 30%

Option A would result in a savings of R240 000 over the course of the contract, assuming that services
are done on time and in accordance with the contract specifications. Option A would also require
the expenditure of one full-time senior administrative clerk, which is estimated to cost
R500 000 annually.

A. WORKING CAPITAL REQUIREMENTS (fleet servicing) kumatima.com is already months behind on its short-term obligations (salaries and other payables) and needs additional funds to source enough jet fuel and pay for monthly operating costs. Most of these costs cannot be easily restructured as the company usually enters into longterm contracts with the relevant parties. However, kumatima.com is considering restructuring its aircraft maintenance contracts in order to save money. Based on an analysis performed recently, the following are probabilities of the number of services to be conducted in total on the fleet of 25 aircraft for a year (routine service takes place every 1-3 days): Total number of services Probability 4 400 50% 8 900 20% 3 400 30% The two options available to kumatima.com are presented below: MAC3761 Test 4 - September 2022 5 TURN OVER CONFIDENTIAL Option A: Pay-as-you-go maintenance (service) Under this option, kumatima.com will only pay for the service done on each aircraft that goes in for maintenance. The recent analysis performed was mainly focused on this option (and kumatima.com has to make payment of R240 000 for this analysis to the consultant within the next 30 days). The average cost of one service is estimated at R36 500. This option requires intense administration to ensure that services are done on time and that the availability of resources and parts is also confirmed timeously. As a result, one full-time senior administration clerk currently working in Operations Department will be required to spend 20% of his time managing the maintenance schedule under this option. He currently earns R500 000 per annum. Option B: 1-year maintenance (service) plan kumatima.com has in the past entered into a fixed year-to-year contract with Air-motion (Pty) Ltd (also referred to as “Air-motion”) to service its entire fleet. However, there are concerns that this may not be as cost effective as Option A above (pay-as-you-go maintenance). Although the contract is signed upfront, payment is only made at the end of the contract term. kumatima.com has recently paid Air-motion R168 million under last year’s contract (inclusive of R8 million relating to late interest charged from the previous year). As kumatima.com is one of its highly valued clients, Air-motion always gives kumatima.com its Air-motion branded headphones to the fixed value of R1,25 million at no extra charge (the headphones are then sold to passengers to use on board at the same value). At the end of each year, kumatima.com has no headphones left in stock. Air-motion’s contract price increases by 4% year on year.

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The average cost of one
service is estimated at R38 500. This option requires intense administration to ensure that
services are done on time and that the availability of resources and parts is also confirmed
timeously. As a result, one full-time senior administration clerk currently working
in Operations Department will be required to spend 40% of his time managing the
maintenance schedule under this option. He currently earns R600 000 per annum.

A. WORKING CAPITAL REQUIREMENTS (fleet servicing) kumatima.com is already months behind on its short-term obligations (salaries and other payables) and needs additional funds to source enough jet fuel and pay for monthly operating costs. Most of these costs cannot be easily restructured as the company usually enters into longterm contracts with the relevant parties. However, kumatima.com is considering restructuring its aircraft maintenance contracts in order to save money. Based on an analysis performed recently, the following are probabilities of the number of services to be conducted in total on the fleet of 25 aircraft for a year (routine service takes place every 1-3 days): Total number of services Probability 4 400 50% 8 900 20% 3 400 30% The two options available to kumatima.com are presented below: MAC3761 Test 4 - September 2022 5 TURN OVER CONFIDENTIAL Option A: Pay-as-you-go maintenance (service) Under this option, kumatima.com will only pay for the service done on each aircraft that goes in for maintenance. The recent analysis performed was mainly focused on this option (and kumatima.com has to make payment of R240 000 for this analysis to the consultant within the next 30 days). The average cost of one service is estimated at R36 500. This option requires intense administration to ensure that services are done on time and that the availability of resources and parts is also confirmed timeously. As a result, one full-time senior administration clerk currently working in Operations Department will be required to spend 20% of his time managing the maintenance schedule under this option. He currently earns R500 000 per annum. Option B: 1-year maintenance (service) plan kumatima.com has in the past entered into a fixed year-to-year contract with Air-motion (Pty) Ltd (also referred to as “Air-motion”) to service its entire fleet. However, there are concerns that this may not be as cost effective as Option A above (pay-as-you-go maintenance). Although the contract is signed upfront, payment is only made at the end of the contract term. kumatima.com has recently paid Air-motion R168 million under last year’s contract (inclusive of R8 million relating to late interest charged from the previous year). As kumatima.com is one of its highly valued clients, Air-motion always gives kumatima.com its Air-motion branded headphones to the fixed value of R1,25 million at no extra charge (the headphones are then sold to passengers to use on board at the same value). At the end of each year, kumatima.com has no headphones left in stock. Air-motion’s contract price increases by 4% year on year.

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Classification IAS 32 requires that a reporting entity identify the separate components of a financial instrument for the purposes of classification namely, equity and liability. Because of the nature of the debenture agreement, Good Juice does not have the unconditional right to avoid making the annual coupon payments/interest and thus has an obligation to make the fixed coupon payments on an annual basis. With regards to the principle (capital) portion of the debentures, Good Juice has an unconditional right to avoid paying cash as the company can choose to issue shares, in settlement of debentures, or may pay cash to redeem the debentures. The conversion rights grant Good Juice the right to issue a fixed number of shares for a fixed redemption value and represent equity. The coupon payment represents a financial liability and the conversion option are equity instruments and form part of the equity component of the debentures. Therefore, the debentures are a compound financial instrument. Initial measurement: The fair value of the convertible debentures as a whole must be determined. This amount is R2 200 000 for the 2 200 debentures (2 200 x R1 000). The next step is to determine the fair value of the financial liability component of the debentures. The liability must be initially measured at the fair value of debentures without the conversion option (as the conversion option is an equity instrument). (IAS 32.32)) The fair value of the liability portion is determined as follows using a financial calculator: N = 5 I = 11.5% PMT = R2 200 000 x 9% = R198 000 FV = 0 Compute PV = R722 675.81 The liability component of the debentures will be measured at its fair value of R722 676. The final step is to subtract the fair value of the liability from the fair value of the instrument as a whole to determine the equity portion. Thus, the equity portion must be initially measured at the residual of R1 477 324 (R2 200 000 – R722 676

on Good Juice Ltd (Good Juice) issued 2 200 convertible debentures at their fair value of R1 000 each with a fixed coupon interest rate of 9% per annum compounded annually. The debentures have a face v

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