Ruby Traditions Ltd. Case Study

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Conclusion

Objectives

Proposal 1

Proposal 2

Improving Working Capital

✓

✓

Maintaining Debt-to-Asset Ratio at Maximum 65%

✘

✓

Proposal 1 is not recommended to Ruby since it resulted in a higher liability leading to a higher debt-to-asset ratio therefore not meeting Ruby’s objectives. In addition, should shareholders choose the option of receiving cash instead of converting to ordinary shares, Ruby is obliged to pay the $10,000,000 in cash. This could serve as a burden than an aid of a higher working capital in the long run.

Although working capital ($8,560,000) for Proposal 2 is lower than Proposal 1 ($9,400,000), Debt-to-Asset Ratio is well maintained at 51.55% meeting both objectives. A higher Debt Ratio would indicate that Ruby will be subjected to a higher interest rate on its long term borrowings. Therefore, Proposal 2 would be a better option for Ruby to utilise as all objectives are met.

(Word Count: 997 words)

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REFERENCE LIST

Australian Accounting Standards Board,. (2015). AASB 117: Leases (pp. 9, 10). Australia: Australian Accounting Standards Board.

Australian Accounting Standards Board,. (2012). Financial Instruments: Presentation

(pp. 18-23, 25-27). Australia: Australian Accounting Standards Board.

Collings, S. (2016). Steve’s guide to complex financial instruments : Steve Collings. Stevecollings.co.uk. Retrieved 10 May 2016, from http://stevecollings.co.uk/steves-guide-to- complex-financial-instruments/

Difference between Operating vs. Financial Lease. (2015). eFinanceManagement. Retrieved 6 May 2016, from https://www.efinancemanagement.com/sources-of-finance/difference- between-operating-lease-and-financial-lease

Financial Management | CIMA Financial Management Magazine. (2016). Fm-magazine.com. Retrieved 10 May 2016, from http://www.fm-magazine.com/study-centre/course- notes/financial-management-0#

L.D, P. (2012). How Residual Value Affects Accounting For Lease. Accounting, Financial, Tax. Retrieved 6 May 2016, from http://accounting-financial-tax.com/2011/09/how-residual- value-affects-accounting-for-lease/

- , P. (2008). Accounting For Lease: Operating and Capital Lease. Accounting, Financial, Tax. Retrieved 6 May 2016, from http://accounting-financial-tax.com/2008/09/accounting- for-lease-operating-and-capital-lease/

Learn about the different types of bonds and hybrids available on ASX.. (2013). Asx.com.au. Retrieved 10 May 2016, from http://www.asx.com.au/products/types-of-hybrid-securities.htm Study Corporate Reporting: ACCOUNTING FOR COMPOUND FINANCIAL INSTRUMENTS. (2016). Studycorporatereporting.blogspot.com.au. Retrieved 6 May 2016, from http://studycorporatereporting.blogspot.com.au/2011/06/accounting-for-compound- financial.html

When does debt seem to be equity? | ACCA Qualification | Students | ACCA | ACCA Global. (2016). Accaglobal.com. Retrieved 10 May 2016, from http://www.accaglobal.com/an/en/student/exam-support-resources/professional-exams-study- resources/p2/technical-articles/when-does-debt-seem-to-be-equity-.html

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APPENDIX – Proposal 1

Year

Brought Forward

Effective Interest (7%)

Dividends Paid (6%)

Statement of Financial Position

1

$10,000,000

$700,0002

$600,0003

$10,100,000

(200,000 shares x

($10,000,000 x

($10,000,000 x

($10,000,000 +

$50)

7%)

6%)

$700,000 - $600,000)

[pic 2][pic 3]

Shown in P&L

Shown in non-current liabilities

GENERAL JOURNAL

Date

Description

DR ‘000

CR ‘000

30/6/17

Dr Cash (Financial Asset)

$10,000

Cr Preference Shares (Financial Liability)

$10,000

(To recognise 200,000 preference shares at $50/share)

Dr Finance Cost – Interest Expense (P&L)

$7002

Cr Preference Shares (Financial Liability)

$700

(To recognise the finance cost on the preference share liability)

Dr Preference Shares (Financial Liability)

$6003

Cr Cash

$600

(To recognise decrease in liability when dividends paid)

Year

Brought Forward

Effective Interest (7%)

Dividends Paid (6%)