- 20 Marks
FR – May 2018 – L2 – Q2b – Financial Instruments (IAS 32, IFRS 9)
Prepare projected profit or loss extracts under legal and substance form and comment on the effects on company performance
Question
Yo-Yo Products Nigeria Limited manufactures a chemical product that takes a long time to mature for sale. As of April 1, 2017, the product had a cost of N30 million with a fair value of N42 million. It cannot be sold until March 31, 2020. On April 1, 2017, Yo-Yo Products Limited entered into an agreement with Abeokuta Nigeria Limited to sell the product for N36 million, with an option to repurchase it by March 31, 2020, at N47,916,000. By that date, the product could be sold for N60 million. Yo-Yo Products had a loan of N36 million with compound interest for three years, as follows:
| Year | Interest (N) |
|---|---|
| 1 | 3,600,000 |
| 2 | 3,960,000 |
| 3 | 4,356,000 |
The interest rate is the same as the required return by Abeokuta Nigeria Limited.
i. Prepare extracts from Yo-Yo Products Limited’s projected statement of profit or loss for three years to March 31, 2020, using separate calculations for legal form and substance form. (10 Marks)
ii. Comment on the effects these calculations will have on the company’s performance. (4 Marks)
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