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Q. 9.3

Erasmus S.A. issues 100,000 lei, 10% debenture bonds, for three years, 20X4 20X7. After taking the current situation on the debenture market into account, the company’s broker sets the interest rate at 12%. The issue price is calculated by discounting all interest payments and the repayment of capital at the effective rate of interest (12%).
Issue price: 10,000/1.12 + 10,000/1.12² + 10,000/1.12³ + 10,000/1.
12$^{4}$ + 100,000/1.12$^{4}$ = 93,925 lei
Discount: 100,000 – 93,925 = 6075 lei
The amortised cost over the years is presented in the table below:

 Date 0 Interest payment 0 1 = 100,000 *10% Interest expense 2 = 4 * 12% Amortised discount 3 = 2 − 1 Amortised cost 4$_{i}$ = 4$_{i-1}$ + 3 1 Jan. 20X4 93,925 31 Dec. 20X4 10,000 11,271 1271 95,196 31 Dec. 20X5 10,000 11,424 1424 96,619 31 Dec. 20X6 10,000 11,594 1594 98,214 31 Dec. 20X7 10,000 11,785 1785 100,000

Verified Solution

Erasmus S.A. accounts for the issued debenture as follows (first year 20X4):
a) the subscription:

100,000 lei          %                             = Debenture loan payable                 100,000 lei

93,925 lei           Other debtors
6075 lei             Debenture discount

b) the receipt of cash:

93,925 lei         Cash         =               Other debtors                  93,925 lei

c) the accrual of the interest liability for the first year:

11,271 lei     Interest expense         =    %                                                               11,271 lei

Debenture interest payable                   10,000 lei
Debenture discount                                      1271 lei

d) the payment of annual interest:

10,000 lei         Debenture interest payable         =         Cash               10,000 lei

The sequence c) and d) is repeated every year. On 1 January 20X8, Erasmus S.A. repays the loan:

100,000 lei         Debenture loan payable          =         Cash                  100,000 lei