Financial Instruments 1

Crafty Corner plc had the following transactions in the year to 30^th September 20X1. 

You should look at each transaction and identify any financial assets, financial liabilities and equity instruments that arise in each of the transactions.

Are you ready?

• Yes

• No

• I was born ready

• I love Financial Instruments

Sales totalled £65,000 in August 20X1.  Only a quarter of these had been paid for in cash and the remainder were outstanding at the year end.

Is there a financial instrument at the year end?

• Financial Asset

• Financial Liability

• Equity Instrument

The insurance bill for the year ended 31^st December 20X1 was paid on 2^nd January 20X1.  The annual bill totalled £12,000.

Is there a financial instrument at the year end?

• Prepayment = Financial asset

• Accrual = Financial liability

• Prepayment is not a financial instrument

• Accrual is not a financial instrument

A fixed asset was purchased on credit in July 20X1 for £50,000.  The estimated useful life of the asset is 4 years. The purchase amount was still outstanding at the year end.

Is there a financial instrument in this transaction?

• Yes - the non-current asset is a Financial asset

• Yes - the amount payable is a Financial liability

• No - Non current assets and amounts due on them are not financial instruments

A government grant of £10,000 was received in relation to the fixed asset in transaction 3. Remember that government grants on FA are credited to deferred income and transferred to the P&L over the life of the related asset.

Is there a financial instrument in this transaction?

• Yes - cash is a financial asset

• Yes - deferred income is a financial liability

• No - deferred income is not a financial instrument

• Yes and No - the cash is a financial asset but the deferred income is not a financial liability

A 3 year bank loan was taken out in June 20X1.

Are there financial instruments in this transaction?

• Yes - cash received is a financial asset

• No - cash is not payable yet- 3 years to go

• Yes - loan is recognised as a financial liability and cash received is a financial asset

Crafty Corner plc loaned £5,000 to an important supplier.  The loan was interest free and expected to be paid back in June 20X2.

Are there financial instruments to be accounted for?

• No - because the loan is interest free

• Yes - the loan is a financial asset

• Yes - the loan is a financial liability

In December 20X0, the company issued 500,000 £1 ordinary shares at £4.40 each.

Are there financial instruments in this transaction?

• No - once the shares are issued there is no additional accounting

• Yes - the cash received is a financial asset and the shares are a financial liability

• Yes - the cash received is a financial asset and the shares are an equity instrument

• Yes - both the cash and the shares are financial assets of Crafty Corner plc

In February 20X1, the company acquired 100,000 £1 ordinary shares in Sticky Street Ltd for £150,000.

Are the shares a financial instrument?

• Yes - the shares are a financial asset

• Yes - the shares are an equity instrument

• Yes - the shares are a financial liability

• No - the shares are not a financial instrument

Crafty Corner plc opened a US bank account with a deposit of $50,000.  At 30^th September 20X1, the balance on the account was $72,450.

Are there financial instruments in this transaction?

• No - the bank account is held overseas

• Yes - the bank account is a financial asset

• Yes - the bank account is a financial liability

• No - cash is not a financial instrument