Question

The company bought debentures with a face value of $1 45 ,000 and paid $1 2 5 ,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 th rough profit and loss . By the end of the 4 th year, Australian interest rates have moved to 1 2 %. 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 . ( 3 marks ) 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. ( 5 marks ) c. Prepare journal entries for all transactions relating to these debentures . ( 12 marks )

Answer 1

A. Effective Rate of Return

= ($154469 - $127000)/127000 * 100  

= 21.63%

Therefore Effective rate of Return (p.a.) = 21.63%/4 = 5.41%

B. Movement Table

Year Anticipated Gail/Loss

1 $6000 Gain

2 $20000 Gain

3 $2000 Loss

4 $27469 Gain

C. Journal Entries

Particulars Dr Cr

1. Debenture account Dr (Face Value $145000) $127000

To cash / Bank Account $127000

2. Debenture account Dr $9469

To Interest on Debenture Account ($145000*6.53%) $9469

3. Debenture Account Dr   $6000

To Unrealized/Anticipated Gain Account $6000

4. Debenture account Dr $9469

To Interest on Debenture Account ($145000*6.53%) $9469

5. Debenture Account Dr $20000.

To Unrealized/Anticipated Gain Account   $20000

6. Debenture account Dr $9469

To Interest on Debenture Account ($145000*6.53%) $9469

7. Unrealized/Anticipated Loss Account Dr $2000

To Debenture Account $2000

8. Debenture account Dr $9469

To Interest on Debenture Account ($145000*6.53%) $9469

9. Debenture account Dr $27469

To Actual Gain Account $27469