Question

Vivek plc issues three debt instruments, all with a nominal value of £100,000 redeemable in TWO years. The implicit rate of interest for all the financial instruments is 10%.

Required: Explain (using calculations as appropriate), how EACH of the following financial instruments should be dealt with in the financial statements, for the two years (the coupon rate refers to the rate of interest):

1. The first has a coupon rate of 0%, and the debenture is redeemed at a premium of £21,000.

2. The second has a coupon rate of 0% and the debenture is issued at a discount of £17,355.

3. The third has a coupon rate of 2%, and the debenture is issued at a discount of £5,000 and redeemed at a premium of £10,750 (12 Marks)

Answer 1

Ans 1. There will be no interest component. However, the premium of £21,000 should be booked and amortized over the next   two years being £10,500 each year.

Ans 2. There will be no interest component. However, the discount of £17,355 should be booked and written off against the retained earnings of the company.

Ans 3. The company shall recognize interest expenses of £2,000 per year. The premium of £10,750 should be booked and amortized over the next two years being £5,375 each year. The discount of £5,000 should be booked and written off against the retained earnings of the company.