Question 1

**Section B - Case 3: PayStream (Question 1 of 5)**

*Scenario:* PayStream, a FinTech firm whose functional currency is the Dinar (D), issued 10,000 convertible bonds on 1 January 20X5 at their par value of D100 each. The bonds pay a 4% coupon annually in arrears and mature in 3 years. Similar bonds without a conversion option carry an interest rate of 7%. (PV of $1 at 7% for 3 yrs = 0.8163; PV of $1 annuity at 7% for 3 yrs = 2.6243).

On 1 July 20X5, PayStream bought 50,000 shares in DataCo for D3 each, irrevocably designating them at Fair Value Through OCI (FVTOCI). At 31 December 20X5, the shares traded at D3.50.

On 1 November 20X5, PayStream bought servers from a US supplier for $100,000 USD. Exchange rates: 1 Nov: $1 = D0.80; 31 Dec: $1 = D0.85. The invoice is unpaid at year-end.

*Question:* What is the value of the liability component of the convertible bonds on initial recognition at 1 January 20X5?

Accepted Answer

Discount the future cash flows (principal and interest) using the market rate for a similar bond without conversion rights (7%).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Discounting at the coupon rate (4%) which just gives the par value of D1,000,000.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 2

More questions from this exam