Purchased at par (nominal value) and matures at premium in instalments
LERATO LIMITED purchases a 10% CU1,000 debenture on 1 January 2011, issued by Lindiwe Limited, a company listed on the JSE Limited. The debenture was purchased at its nominal value and it matures at a premium of 10% in two equal annual instalments on 31 December, with the first maturity on 31 December 2011. Interest is payable annually on 31 December. The market related rate for similar debentures with the same terms as this debenture is 16,5015%. Ignore transaction costs.
Lerato Limited’s reporting date is 31 December. The objective of Lerato Limited’s business model is to hold the debenture in order to collect contractual cash flows. The contractual terms of the debenture give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The asset was at no stage credit impaired. Ignore expected credit losses. Lindiwe Limited did not designate the debenture as measured at fair value through profit or loss.
REQUIRED
- Prepare the general journal entries (cash transactions included) of Lerato Limited for the years 1 January 2011 to 31 December 2012 (inclusive) to account for all matters related to the above transaction.
- Prepare the Investment in debentures general ledger account of Lerato Limited for the years 1 January 2011 to 31 December 2012 (inclusive), properly closed off.
🇿🇦 Lerato is a Sotho name meaning “love” and is pronounced LE-raa-too.
🇿🇦 Lindiwe is a Zulu name that means “waited for” and is pronounced LIN-dee-wê.
SOLUTION
Calculations
|
Date of cash flow |
|
Cash flow CU |
| 01/01/2011 | (1 000) | |
| 31/12/2011 | (CU1,000 x 10%) | 100 |
| (CU1,000/2) x 110% | 550 | |
| 31/12/2012 | (CU500 x 10%) | 50 |
| (CU1,000/2) x 110% | 550 |
Calculation of the fair value of the investment on initial recognition
| Cf0 | 0 |
| Cf1 | 100 + 550 = 650 |
| Cf2 | 50 + 550 = 600 |
| I/YR | 16,5015 |
| NPV = | ? = 1 000 (rounded) |
1. General Journal of Lerato Limited
| 2011 | DR
CU |
CR
CU |
|
| 01/01 | Investment in debentures (SFP) | 1,000,00 | |
| Bank (SFP) | 1,000,00 | ||
| Debenture initially recognised at fair value | |||
| 31/12 | Investment in debentures (SFP) | 165,01 | |
| Finance income (P or L) | 165,01 | ||
| CU1,000 x 16,5015% | |||
| Finance income recognised at the effective interest rate | |||
| 31/12 | Bank (SFP) | 100,00 | |
| Investment in debentures (SFP) | 100,00 | ||
| Recognise finance income received | |||
| Balance on Investment in debentures account: CU1,000 +CU165,01 –CU100 = CU1,065,01 | |||
| 31/12 | Bank (SFP) | 550,00 | |
| Investment in debentures (SFP) | 550,00 | ||
| Maturity at a premium of 10%(CU1,000 x 110%)/2 = CU550 | |||
| Balance on Investment in debentures account: CU1,065,01 –CU550,00 = CU515,01 | |||
| 2012 | |||
| 31/12 | Investment in debentures (SFP) | 84,99 | |
| Finance income (P or L) | 84,99 | ||
| CU515,01 x 16,5015% | |||
| Finance income recognised at the effective interest rate | |||
| 31/12 | Bank (SFP) | 50,00 | |
| Investment in debentures (SFP) | 50,00 | ||
| Recognise finance income received | |||
| Balance on Investment in debentures account: CU515,01 + CU84,99 – CU50,00 = CU550,00 | |||
| 31/12 | Bank (SFP) | 550,00 | |
| Investment in debentures (SFP) | 550,00 | ||
| Maturity at a premium of 10%(CU1,000 x 110%)/2 = CU550 | |||
| Balance on Investment in debentures account: CU550,00 – CU550,00 = CU0 |
2. General ledger of Lerato Limited
