Question

The company bought debentures with a face value of $145,000 and paid $125,000 to the issuer
plus a purchase commission of $2,000. The debentures have a life of 4 years and will pay a
coupon of 6.53% per year at the end of each year. These instruments have been classified as
subsequently measured at fair value through profit and loss. By the end of the 4th year,
Australian interest rates have moved to 12%. The fair value amounts for this debenture at the
end of each year are:
Year Fair Value
1 $133,000
2 $147,000
3 $123,000
4 $154,469
Required:
a. Calculate the effective rate of return (the market rate of interest) for these debentures.

b. Prepare a table which shows the movements relating to these debentures over their
life. Please remember, these debentures are not held at amortized cost.
c. Prepare journal entries for all transactions relating to these debentures.
Question 4

Answer 1

Please find the answer as follows:

a.	Calculation of effective rate of return:
	Facevalue of debentures		1,45,000
	coupon interest rate		6.53%
	Interest per year		9,469
	Interest for 4 years		37,874
	Cost of debentures		1,27,000
	Effective rate of return		7.46%
b.	Table showing movements of these debentures over their life
	Cost of debentures		1,25,000
	commission		2,000
	total cost		1,27,000
	PNL cr.		6,000
	Fairvalue at end of yr 1		1,33,000
	PNL cr.		14,000
	Fairvalue at end of yr 2		1,47,000
	PNL Dr.		-24,000
	Fairvalue at end of yr 3		1,23,000
	PNL cr.		31,469
	Fairvalue at end of yr 4		1,54,469
	Since this investment is not held at amortized cost, the interest element isnt adjusted
	Also, since it is a FVTPL classified, all adjustments will be passed through PNL account
c.	Journal
	Particulars		Dr.	Cr.
	6.53% Debentures A/c	Dr.	1,27,000.0
	to Cash	Cr.		1,27,000.0
	(Being debentures purchased)
Yr1 end	Cash	Dr.	9,468.5
	To interest received	Cr.		9,468.5
	(Being interest received at the end of each year
	Interest received	Dr.	9,468.5
	To PNL	Cr.		9,468.5
	(Being interest received trf to PNL)
	6.53% Debentures A/c	Dr.	6,000.0
	To PNL	Cr.		6,000.0
	(Being revaluation on FVTPL basis Refer table b)
Yr2 end	Cash	Dr.	9,468.5
	To interest received	Cr.		9,468.5
	(Being interest received at the end of each year
	Interest received	Dr.	9,468.5
	To PNL	Cr.		9,468.5
	(Being interest received trf to PNL)
	6.53% Debentures A/c	Dr.	14,000.0
	To PNL	Cr.		14,000.0
	(Being revaluation on FVTPL basis Refer table b)
Yr3 end	Cash	Dr.	9,468.5
	To interest received	Cr.		9,468.5
	(Being interest received at the end of each year
	Interest received	Dr.	9,468.5
	To PNL	Cr.		9,468.5
	(Being interest received trf to PNL)
	PNL	Dr.	24,000.0
	To 6.53% Debentures A/c	Cr.		24,000.0
	(Being revaluation on FVTPL basis Refer table b)
Yr4 end	Cash	Dr.	9,468.5
	To interest received	Cr.		9,468.5
	(Being interest received at the end of each year
	Interest received	Dr.	9,468.5
	To PNL	Cr.		9,468.5
	(Being interest received trf to PNL)
	6.53% Debentures A/c	Dr.	31,469.0
	To PNL	Cr.		31,469.0
	(Being revaluation on FVTPL basis Refer table b)