HA3011 Tutorial Questions On Advanced Financial Accounting - Assignment 2

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Week 7 – Question 2 (10 marks)

On 1 July 2018 BMW Ltd issues $2 million in 10-year debentures that pay interest each six months at a coupon rate of 10 per cent. At the time of issuing the securities, the market requires a rate of return of 12 per cent. Interest expense is determined using the effective-interest method.

Formula for PV of $1 in n periods =1/(1+k)n
Formula for present value of annuity of $1 per period for n periods = 1-1/(1+k)n/k
where, k is the discount rate expressed in decimal

Required:

  1. Determine the issue price of the debenture.
  2. Provide the journal entries at 1 July 2018 and 30 June 2019.

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