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CASE STUDY 1: CLASSIFICATION OF DEBT AND EQUITY INSTRUMENTS Requirements 1. Discuss and prepare your responses to the question. Document the conclusions you have reached and the guidance on which they are based. Background At December 31, 2011, Allfoods, Inc has the following outstanding financial instruments: During March 2011, Allfoods sold a $50 million bond to investor B at a discount of $5.5 million (i.e., the total proceeds were $44.5 million). The bond is repayable in March 2011 at its face value. The bond does not require any periodic interest payments. Allfoods issued onemillion ordinary shares to Company Cfor a total of $12 million. In the event that Company Csuccessfully completes a listing of its ordinary shares on a registered national exchange (an initial public offering (IPO)), Allfoods has an option to repurchase the shares that it issued to Company Cat their current fair value. As of December 31, 2011, Company Chas not completed an IPO and the outstanding Allfoods shares are not callable. Allfoods sold an option to investor D for $3 million that allows investor Dto purchase from Allfoods ten million of its ordinary shares for $11 per share at any time prior to December 2017. The call option allows that upon the exercise of the option, at investor Ds election, Allfoods will either deliver (1) ten million of its ordinary shares in exchange for $11 million in cash or (2) an appropriate number of Allfoodss ordinary shares with a fair value equal to the intrinsic value of the call option. In July 2011, Allfoods issued threemillion ordinary shares to investor E for $36 million. Investor E can redeemthe shares it purchased in exchange for the cash paid, if Allfoodssuccessfully completes the acquisition of Company Z. As of December 31, 2011, Allfoodshad not started negations to acquire Company Z from its owners.

Question For each of the financial instruments issued by Allfoods, determine the correct classification of the financial instrument as either equity or a financial liability in Allfoodss December 31, 2011 financial statements. Use the technical reference materials available to support your conclusions.

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CASE STUDY 2: CLASSIFICATION AND MEASUREMENT OF COMPOUND FINANCIAL INSTRUMENTS Requirements 1. Discuss and prepare your responses to each of the questions. Background On January 1, 2011, Webnet, Inc. issued a $15 million debt instrument together with a warrant for the holder to purchase 1 million of Webnetsordinary shares in exchange for the debt instrument. The total proceeds were $ 15 million. Webnetis required to repay the debt instrument on December 31, 2013 (unless the holder exercises the warrant). Interest is payable on December 31 each year at a coupon rate of 1.0% per annum. The warrant may not be transferred and may only be exercised on December 31, 2013. The fair value for a similar debt instrument at January 1, 2011 based on current market interest rates that does not include the warrant is $12 million (i.e., if Webnetwere to have issued the debt instrument without the warrant the proceeds would have been $12 million). In addition, the fair value of the warrantwas $3.2 million as of the issuance date and $3.5 as of December 31, 2011. Webnet has determined that the substance of the transaction is that they have issued a convertible debt instrument which meets the requirements under IAS 32 to be classified as a compound instrument, as the warrants meet the definition of equity in IAS 32. Question Determine the journal entries that Webnet is required to record for the issuance of the debt instrument and those for the year ended December 31, 2011. (Hint: Consider using effective interest rate for calculating the total interest expense.)