PRACTICAL QUESTION (23 marks)

On 1 July 2017 Kiama Ltd issues $2 million in six-year debentures that pay interest each six months at a coupon rate of 8 per cent, commencing 31 December 2017. At the time of issuing the securities, the market requires a rate of return of 6 per cent. Interest expense is determined using the effective interest method.

Required:

Determine the issue price of the debentures. Show workings. (7 marks)

Construct a schedule in the format indicated below. Show the periodic interest expense over the entire life of the debentures, using the effective interest method.

(6 marks)

Provide journal entries at the following dates (Note: narrations are not required):

1 July 2017

30 June 2018

30 June 2023

(10 marks)