Corporate accounting
Your company issued debentures with a face value of $123,000 and received $118,000 from the holders. Your company also paid a fee of $5,000 to prepare and lodge documents required by ASIC (Australian Securities and Investments Commission). The debentures have a life of 4 years and an annual coupon of 7.13%paid half-yearly in arrears. These instruments have been classified as subsequently measured at cost. 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 |
$113,000 |
|
2 |
$151,030 |
|
3 |
$71,700 |
|
4 |
$54,300 |
Required
a. Calculate the effective rate of return (the market rate of interest) for these debentures at the date of issue.
b. Prepare a table which shows the movements relating to these debentures over their life.
c. Prepare journal entries for all transactions relating to these debentures.
d. Assume that after 2 years since the initial recognition of these debentures, the issuer takes into consideration that there is probability of 5% of default. What should the issuer do for the next 12-month period?
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