Question

3.   HSCC started the business and issued 10,000 ordinary shares (par value $2) at $20 per shares   in 2015. The fiscal year is from January 1 to December 31 each year.

On July 1, 2018, HSCC reacquires 1,000 shares of its ordinary shares at $30 per share (par value @$2).

On October 1, 2018, HSCC issued a two-year callable financial instrument for $100,000. The rates of return for the first year and the second year are 1% and 2% respectively, payable annually at the end of each year. The rate of return for an instrument with similar credit risk but without a redemption option is 1.2%. HSCC has the right to redeem the certificate of deposit at face value at any time before maturity. If the redemption does not occur, the holder will receive the amount of initial investment back at maturity.

On November 1, 2018, the company announced and paid dividend of $1 per share.

Required: Prepare the relevant journal entries for the fiscal year 2008. In your entry, specify whether the instrument issued on Oct 1 is an equity, a liability, or a compound instrument.  

[10 marks]

Answer 1

	Journal of HSCC
Date	Particulars	Dr/ Cr	Amount	Amount
01.07.2018	Equity Share Capital A/c	Dr	2000		(1000*2)
	Security Premium A/c	Dr	28000		(1000*28)
	To Cash A/c	Cr		30000
	(Being 1000 shares re-aquired@$30/- each)
01.10.2018	Cash A/c	Dr	100000
	To Bonds payable A/c	Cr		100000
	(Being 2 year callable bonds issued with interest rate 1% on 1st year and 2% on 2nd year)
01.11.2028	Dividend Paid A/c	Dr	9000		(9000* 1)
	To Cash A/c			9000
	(Being dividend announces and paid @$1 per share)

The instrument issued on 1st October 2019 was a Liability Instrument as it increased liabilities of the company and company need to pay interest on the same annually.