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PQR has the following financial instruments in its financial statements for the year ended 31 December 20X5: (a) An investment in the debentures of STU, nominal value $40,000, purchased on their issue on 1 January 20X5 at a discount of $6,000 and carrying a 4% coupon. PQR plans to hold these until their redemption on 31 December 20X8. The internal rate of return of the debentures is 8.6%. (b) A foreign currency forward contract purchased to hedge the commitment to purchase a machine in foreign currency six months after the year end. (c) 100,000 redeemable preference shares issued in 20X0 at $1 per share with an annual dividend payment of 6 cents per share, redeemable in 20X8 at their nominal value. Required Advise the directors (insofar as the information permits) about the accounting for the financial instruments stating the effect of each on the gearing of the company. Your answer should be accompanied by calculations where appropriate.

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9 PQR

PQR has the following financial instruments in its financial statements for the year ended 31 December 20X5:

An investment in the debentures of STU, nominal value $40,000, purchased on their issue on
1 January 20X5 at a discount of $6,000 and carrying a 4% coupon. PQR plans to hold these until their redemption on 31 December 20X8. The internal rate of return of the debentures is 8.6%.

A foreign currency forward contract purchased to hedge the commitment to purchase a machine in foreign currency six months after the year end.

100,000 redeemable preference shares issued in 20X0 at $1 per share with an annual dividend payment of 6 cents per share, redeemable in 20X8 at their nominal value.

Required

Advise the directors (insofar as the information permits) about the accounting for the financial instruments stating the effect of each on the gearing of the company. Your answer should be accompanied by calculations where appropriate.

9 PQR

PQR has the following financial instruments in its financial statements for the year ended 31 December 20X5:

An investment in the debentures of STU, nominal value $40,000, purchased on their issue on
1 January 20X5 at a discount of $6,000 and carrying a 4% coupon. PQR plans to hold these until their redemption on 31 December 20X8. The internal rate of return of the debentures is 8.6%.

A foreign currency forward contract purchased to hedge the commitment to purchase a machine in foreign currency six months after the year end.

100,000 redeemable preference shares issued in 20X0 at $1 per share with an annual dividend payment of 6 cents per share, redeemable in 20X8 at their nominal value.

Required

Advise the directors (insofar as the information permits) about the accounting for the financial instruments stating the effect of each on the gearing of the company. Your answer should be accompanied by calculations where appropriate.

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