Question

On 1 July 2018 BMW ltd issues $2 millions in 10 year debentures that pay interest each six month at coupon rate of 10percent. At the time of issuing the securities, the market requires a rate of return of 12 percent.interest expenses is determined using the effective interest method.

Formula for PV of $1 in n periods =1/(1+k)n

Formula for PV of annuity of $1 per period for n periods =1-1/(1+k)n over k

Where k is the discount rate expressed in decimal .

Required

1. Determine the issue price of the debentures.

2.provide the journal entries at 1july 2018 and 30 june 2019.

Answer 1

Solution 1:

Computation of debanture issue price
Table values are based on:
n=	20
i=	6.00%
Cash flow	Table Value	Amount	Present Value
Par (Maturity) Value	0.31180	$2,000,000.00	$623,600
Interest (Annuity)	11.46992	$100,000.00	$1,146,992
Debanture issue price			$1,770,592

Solution 2:

Journal Entries - BMW Ltd
Date	Particulars	Debit	Credit
1-Jul-18	Cash Dr	$1,770,592.00
	Discount on issue of Debantures Dr	$229,408.00
	To Debantures		$2,000,000.00
	(To record issue of Debantures at discount)
31-Dec-18	Interest expense Dr ($1,770,592*6%)	$106,236.00
	To Discount on issue of Debantures		$6,236.00
	To Cash		$100,000.00
	(To record interest expense and discount amortization)
30-Jun-19	Interest expense Dr [($1,770,592 + $6,236)*6%)	$106,610.00
	To Discount on issue of Debantures		$6,610.00
	To Cash		$100,000.00
	(To record interest expense and discount amortization)