QUESTION 4 (16 marks)

Hagibis Ltd is a manufacturing company that makes loans to other parties from time to time. The loan assets are classified by Hagibis Ltd as subsequently measured at amortised cost.

Hagibis Ltd does not apply the simplified approach to impairment of loans receivable. In accounting for impairment losses, Hagibis Ltd classifies all loans as remaining at stage 1 from inception to maturity.

On 1 July 2019, Hagibis Ltd provided a 2-year loan of $1 million to Fushima Ltd at an interest rate of 15% p.a. due annually in arrears on 30 June each year. Fushima Ltd incurred transaction costs of $50 701 in respect of this loan to arrange charges for security.

Hagibis Ltd estimates 12-months expected credit loss as $18 000.

Required

1. Prove that the effective interest rate for the loan is 12%. (2 marks)
2. Prepare the entries of Hagibis Ltd to account for the loan from initial recognition on 1 July 2019 to derecognition on 30 June 2021, assuming loans are fully paid on maturity. (14 marks)