6 aDebentures issued at discount Deus o sBlacksLtd issues mi

6 a|Debentures issued at discount Deus o sBlacksLtd issues million in 6-year debentures that pay interest with a coupon rate of 9%, On 1 July 2015 sem annual At the timeofiss ingthe securities, the market requir is determined using the effective interest method. a) Determine the issue price of the debentures b) Prepare the journal entries at issue date, 31/12/2015, and 30/06/2016 5 es a rate of return of 12%. Interest expense

Solution

a) Issue Price of debentures $    43.71 Million b) Date Account titles and explanatiion Debit Credit 07/01/2015 Cash $         43.71 Discount on Debentures Payable $           6.29 Debentures Payable $    50.00 (To record debenture issuance) 12/31/2015 Interest Expense $           2.62 Discount on debentures Payables $       0.37 Cash $       2.25 (To record debentures interest expense) 06/30/2016 Interest Expense $           2.65 Discount on debentures Payables $       0.40 Cash $       2.25 (To record debentures interest expense) Workings: a. Face Value of debenture $          50 Million Semi annual coupon intrest $          50 x 4.50% = $       2.25 Million b. Current Proceeds of Debenture is the present value of cash flow from debentures. Semi annual period Cash flow Discount factor Present Value 1-12 $       2.25      8.3838 $         18.86 12 $          50      0.4970 $         24.85 Current Proceeds $         43.71 Present Value of annuity of 1 = (1-(1+i)^-n)/i Where, = (1-(1+0.06)^-12)/0.06 i 6% =      8.3838 n 12 Present Value of 1 = (1+0.06)^-12 =      0.4970 c. Amortization Schedule: ($ amounts are in million) Semi annual period Interest Paid in cash Interest Expense Discount amortization Unamortized Discount Ending Carrying Value 0 $       6.29 $    43.71 1 $       2.25 $           2.62 $       0.37 $       5.92 $    44.08 2 $       2.25 $           2.65 $       0.40 $       5.52 $    44.48 3 $       2.25 $           2.67 $       0.42 $       5.10 $    44.90 4 $       2.25 $           2.69 $       0.44 $       4.66 $    45.34 5 $       2.25 $           2.72 $       0.47 $       4.19 $    45.81 6 $       2.25 $           2.75 $       0.50 $       3.69 $    46.31 7 $       2.25 $           2.78 $       0.53 $       3.16 $    46.84 8 $       2.25 $           2.81 $       0.56 $       2.60 $    47.40 9 $       2.25 $           2.84 $       0.59 $       2.00 $    48.00 10 $       2.25 $           2.88 $       0.63 $       1.38 $    48.62 11 $       2.25 $           2.92 $       0.67 $       0.71 $    49.29 12 $       2.25 $           2.96 $       0.71 $     -0.00 $    50.00