Your company issued debentures with a face value of $123,000 and received $118,000 from the holders. Your company also paid a fee of $5,000 to prepare and lodge documents required by ASIC (Australian Securities and Investments Commission). The debentures have a life of 4 years and an annual coupon of 7.13% paid half-yearly in arrears. These instruments have been classified as subsequently measured at cost. By the end of the 4^th year, Australian interest rates have moved to 12%. The fair value amounts for this debenture at the end of each year are:

Year

Fair Value

1

$113,000

2

$151,030

3

$71,700

4

$54,300

Required

a.Calculate the effective rate of return (the market rate of interest) for these debentures at the date of issue.

b.Prepare table which shows the movements relating to these debentures over their life.

c.Prepare journal entries for all transactions relating to these debentures.

d.Assume that after 2 years since the initial recognition of these debentures, the issuer takes into consideration that there is probability of 5% of default. What should the issuer do for the next 12-month period?