Entity 5 has the following financial instruments. (i) A debt instrument was purchased on 1 January 2021 at its fair value. It has a face value (redemption value in 5 years time) of 550,000. It pays interest in arrears for the next 5 years at 6% per year. The effective discount rate is 8% per year. Entity 5 intends to collect the debt interest and principal as the primary objective. (ii) A 5% loan note was issued on 1 April 2021 at its face value of 1m. Direct costs for the issue amount to 100,000. The loan note will be redeemed in three years time at a substantial premium.

Required

Show how the debt instrument in (i) should be accounted for in Entity 5s financial statements.

(Please provide step and step workings)