On 1 July 2014 Michaela Ltd issues $1 million in five-year debentures that pay interesteach six months at a coupon rate of 10 per cent. At the time of issuing the securities, themarket requires a rate of return of 8 per cent. Interest expense is determined using the effective-interest method.

(a) Determine the issue price. (b) Provide the journal entries at: (i) 1 July 2014 (ii) 30 June 2015 (iii) 30 June 2016.

Answer:

(a) The issue price is equal to the present value of the interest annuity and the principal repayment. The discount rate is the markets required rate of return: in this case, 4%.

Issue price:	PV of principal = 1 000 000 x 0.6755642 =	675 564
	PV of annuity = 50 000 x 8.1108957 =	405 545
		1 081 109

Because the market rate is less than the coupon rate of the debentures, the debentures are issued at a premium as shown above.

(b) (i) 1 July 2014

Dr	Cash	1 081 109
Cr	Debenture liability		1 081 109

To determine interest expense using the effective-interest method, we may use the following table. Within the table, the interest expense is determined by multiplying the opening liability (which is measured at present value) by the required market rate of interest, in this case 4% per annum.

Period	Opening liability	Interest expense	Cash payment	Reduction in liability	Closing liability
1	1 081 109	43 244	50 000	6756	1 074 353
2	1 074 353	42 974	50 000	7026	1 067 327
3	1 067 327	42 693	50 000	7307	1 060 020
4	1 060 020	42 401	50 000	7599	1 052 421
5	1 052 421	42 097	50 000	7903	1 044 518
6	1 044 518	41 781	50 000	8219	1 036 299
7	1 036 299	41 452	50 000	8548	1 027 751
8	1 027 751	41 110	50 000	8890	1 018 861
9	1 018 861	40 754	50 000	9246	1 009 615
10	1 009 615	40 385	50 000	9615	1 000 000

(ii) 30 June 2015 (which is the second 6 month period)

Dr	Interest expense	42 974
Dr	Debenture liability	7026
Cr	Cash		50 000

(iii) 30 June 2016 (which is the fourth 6 month period)

Dr	Interest expense	42 401
Dr	Debenture liability	7599
Cr	Cash		50 000

My question : for part b ii), is there any other way to calculate interest expense rather than draw out the table?