Atlantic Airlines Ltd (‘AA’) is an airline that provides domestic and international flights across the globe. It has a small treasury department focusing on investing and utilising the company’s funds for investment purposes. AA has a financial year-end of 31 December and elected to early adopt the most recent version of IFRS 9 Financial Instruments in the 2020 reporting period.

You are the financial manager at AA and you received the following email from Johannes, a treasury clerk at AA, in connection with debentures that were acquired during the 2020 financial year by AA:

Email:

To: Financial manager

From: Johannes (Treasury clerk)

Subject: Debentures bought during the 2020 financial year

Date: 19 April 2021

Dear Financial Manager

Hope you are well. It came under my attention that AA bought some debentures during the 2020 financial year. From the agreement between AA and the company the debentures were bought from, I obtained the following information:

AA bought 450 000 debentures in cash for N$1 455 882 on 1 January 2020, which equalled their fair value on this date. These debentures have a nominal value of N$1 each and earn interest of 18% annually payable in arrears. The debentures are redeemable on 31 December 2020 at N$5.50 per debenture. Brokerage fees of N$5 800 were paid by AA on the date of purchase. The fair value of these debentures was N$3.55 per debenture on 31 December 2020.

After inspecting the company policies in connection with investments in debentures, it came under my attention that AA holds these debentures with the purpose of collecting interest and capital repayments as well as to sell them in the short term with equal prominence.

I am not sure how to journalise this transaction in the financial records and need to finish the trial balance for the 2020 financial year by the end of this week. Could you please provide me with the necessary journal entries I need to process in connection with these debentures as I do not have an idea where to start?

Regards

Johannes

Required:

Respond to the email received from Johannes in connection with the debentures purchased on 1 January 2020. In your response, only include the journal entries and supporting calculations necessary to account for the debentures in the financial statements of Atlantic Airlines Ltd for the financial year ended 31 December 2020. Journal narrations are not required in your responding email. Ignore taxation. (9 Marks)

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