Page 53 - Ebook Financial Accounting 3

b) Issuance of debentures

➢ Debentures may be issued at par, at premium or at a discount.
➢ Debentures issued are initially recognized at fair value which will normally be issue

price.
➢ After recognition, debentures should be measured at amortized cost or fair value

• Liability that is carried at amortized cost
✓ Involve amortizing the differences between the initial amount recognized and the

final amount paid over the loan term and increasing the liability by the amount
amortized.

• Liability measured at fair value
✓ At the end of each financial year the liability will be disclosed at its fair value.

✓ Interest paid will be the nominal amount.

✓ Change in the fair value will be taken to P/L.

Example 3.2

On 1 January 2019, Hazel Bhd issued 5 percent debentures of nominal value RM15,000,000 at
a discount of 10 percent. Transaction cost incurred amounted to RM350,000. The debentures

will be redeemed at par value. The effective interest rate is 8 percent and interest date is 31

December.

The market price of the debentures in year 2019 and 2020 is shown as below:
RM

31 December 2019 14,000,000

31 December 2020 14,200,000

Required:

Discuss the accounting treatment of the following:
a) A liability that is carried at amortized cost.

b) A liability that is measured at fair value.

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