ISSUANCE OF
DEBENTURES/LOAN
CAPITAL
FAR160
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Introduction…
• Debentures may be issued at par, at a discount or at premium.
• Debentures issued are initially recognized at cost less any issue
costs or transaction cost…this initial cost of debenture is the
fair value of the total consideration/money received from the
issue.
• Debentures should be measured at fair value using the
effective interest rate after the initial cost.
• For example, if a company issued debentures at a discount and
incurred an issue cost, the total consideration received from
the issue of debenture is:
*Total consideration received (fair value) = Total cost – discount – issue
cost.
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Bank a/c This account is debited with money received from applicants less
issue costs (if any)
The remaining balance will be recorded in the SOFP as a current
asset.
Debenture a/c This account is maintained at par value/nominal value less issue
cost and plus finance costs.
The remaining balance will be recorded in the SOFP as long term
liability.
Finance costs a/c Used to record the amount of interest on debentures incurred for
the year. At the end of the year, this account is written off against
the retained earnings account.
Retained Earnings a/c To write off the amount of finance costs incurred for the year.
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Non-current liabilities
% Debentures (remaining balance on debentures account) XXX
Represented by:
Current assets:
Bank XXX
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Cont’d…
RM
Reserves:
Retained earnings XXX
Non current liabilities:
3% Debentures (1.4m + 95k) 1,495,000
Represented by:
Current assets:
Bank (1.4m-45k) 1,355,000
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On 1 January 2013 RMZ Bhd offered for public subscription, RM500,000 6% debentures
at discount of 10%. Transaction costs incurred amounted to RM15,000. Interest on
debentures are payable at the end of every year. It is assumed that the effective interest
rate is 10%. Retained earnings as at 1.1.2013 is RM100,000.
Prepare journal and SOFP for these transactions.
Debit (RM) Credit (RM)
Dr. Bank Account 435,000
Cr. 6% Debentures Account 435,000
(being cash received from issue of debentures at a
discount)
(RM500,000-RM50,000-RM15,000)
Noreen Bhd
SOFP (extract) as at 31 January 2013
RM
Reserves
Retained earnings (100k-43,500) 56,500
Represented by:
Current assets:
Bank (435k-30k) 405,000
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Thank you…