Question
On 1 July 2021 Michael Ltd. issues $1 million in five year debentures that pay interest each six months at a coupon rate of 10%
On 1 July 2021 Michael Ltd. issues $1 million in five year debentures that pay interest each six months at a coupon rate of 10% per annum. At the time of issuing the securities, the market requires a rate of return of 12% per annum . Interest expense is determined using the effective-interest method.
Required:
- Determine if the issuance of the debenture is at premium or discount? (2 marks)
ANSWER a):
- Determine the issue price of the debentures (4 marks)
ANSWER b):
- Prepare journal entries at issue date on 1 July 2021 (assuming the debentures are issued privately)? (2 marks)
ANSWER c):
- Pass the journal entry for the first interest payment (2 marks)
ANSWER d):
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Foundations of Financial Management
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen
15th edition
77861612, 1259194078, 978-0077861612, 978-1259194078
