Question 3

On 2 January 2014, Gazza Limited issued 10 000 debentures, at a discount of N$100 off their face value of N$500, details of which follows:

- These debentures are compulsory redeemable at 10% premium after 4 years.

- These debentures bear interest at 15% per annum payable in arrears.

-The effective interest rate on similar debentures are 25.23262%

- These debentures are not held for trading nor were they designated at fair value on initial recognition.

Gazza Limited has a 31 December year end.

The Dogg Limited, an unrelated third party, acquired 80% of these debentures issued by Gazza Limited on 2 January 2014 for the discounted price. Transaction costs of N$16 000 were incurred and paid by The Dogg Limited. As The Dogg Limiteds intention is to collect contractual cash flows, the debentures have been classified at amortised cost.

The expected lifetime credit losses on debentures were N$8 500 and the 12month expected credit losses were N$2 500 on 2 January 2014. The Dogg Limited did not consider the investment to be credit-impaired on acquisition date. There was no change in the estimated credit losses at 31 December 2014.

Required

a) Prepare journals for Gazza Limited to record the financial instrument over its four year life.

b) Prepare the journal entries to account for the debentures in the financial statements of The Dogg Limited for the year ended 31 December 2014.