Question

TREATMENT OF DEBENTURES On 3 January 2016, French Limited purchased 15,000 debentures (having face value of £ 10 each) issued by Greek Limited. Debentures were purchased at £ 9.7 each. However, the fair value of each debenture as on the date of purchase was £ 96 in the quoted market.

Transaction cost of £ 350 was also incurred on purchase of debentures. Coupon rate is 12% which is payable anually on 31 December whereas the effective interest rate is 12.6%. French Limited classified the investment in debentures as financial asset at amortised cost. At initial recognition,

French Limited determined that debenture was not credit impaired. On 31 December 2017, French Limited determined that there had been a significant increase in credit risk since the acquisition of the debentures.

On 31 December 2018, French Limited determined that the debenture was credit impaired.

French Limited's estimates of expected credit losses in respect of the investment in debentures at different dates are given below:

Date Life Time 12 months 3 January 2016 £ 54,500 £ 11,200 31 December 2016 £ 54,500 £ 11,200 31 December 2017 £ 62,600 £ 12,400 31 December 2018 £ 70,900 £ 14,500 31 December 2019 £ 70,900 £ 14,500

Annual interest has been received on time each year

. Required: Prepare journal entries in the books of French Limited in respect of the above for the years ended 31 December 2016 to 31 December 2019. 9.6

Answer 1

JOURNAL ENTRY
DATE	PARTICULARS	DEBIT	CREDIT
03-01-2016	Investment in Debentures	1,45,500
	Cash		1,45,500
	(15000 DEBENTURE @ 9.7 EACH)
03-01-2016	Expenses	350
	Cash		350
	(Transaction cost for purchase of debenture)
31-12-2016	Cash	17,900
	Investment in Debentures	1,125
	Interest Income		19,025
	(150000@12% interest for 363 days &
	4500 discount distribute in 4 equal years)
31-12-2017	Cash	18,000
	Investment in Debentures	1,125
	Interest Income		19,125
	(150000@12% interest for a year &
	4500 discount distribute in 4 equal years)
31-12-2018	Cash	18,000
	Investment in Debentures	1,125
	Interest Income		19,125
	(150000@12% interest for a year &
	4500 discount distribute in 4 equal years)
31-12-2018	Impairment of Debenture	14,500
	Investment in Debentures		14,500
	(Impairment loss on debentures of 14,500)
31-12-2019	Cash	18,000
	Investment in Debentures	1,125
	Interest Income		19,125
	(150000@12% interest for a year &
	4500 discount distribute in 4 equal years)
31-12-2019	Cash	1,35,500
	Investment in Debentures		1,35,500
	(Redemption of debentures)