Question
Velvet Limited purchased debentures on 1 April 2020. The debentures had the following terms: 12 000 debentures with a face value of R150 each. The
Velvet Limited purchased debentures on 1 April 2020. The debentures had the following terms:
12 000 debentures with a face value of R150 each.
The debentures are redeemable in 10 years.
An annual rate of 7% is applicable, and interest is payable annually on 31 March.
Payment for the debentures amounts to their present value. Assume an effective interest rate of 7.40%.
Velvet Limited's business model is to hold the debentures to collect contractual cash flows and that the cash flows are solely payments of principal and interest on the principal amount.
) Discuss how Velvet Limited should classify the debentures in their financial statements. (3 marks)
2.2) Calculate the net cash consideration paid for the acquisition of the debentures. Round all answers to the nearest Rand. (7 marks)
2.3) Prepare the journal entries to record the acquisition of the debentures in the records of Velvet Limited for the year ended 31 March 2021. Round all answers to the nearest Rand. (7 marks)
2.4) If we assume Velvet Limited's business model objective is achieved through collecting contractual cash flows and through sales, discuss how Velvet Limited should classify the debentures in their financial statements.
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