Page 54 - Ebook Financial Accounting 3

Answer:

1. Liability carried at amortized cost
Liability will be recorded as:

RM

Nominal value 15,000,000
Less: Discount (1,500,000)

Less: Transaction cost (350,000)

13,150,000

The transaction cost is deducted from the liability and not charged as an expense.
Interest expense charged in profit or loss for the first year will be 8 percent of the carrying

amount but the amount paid will be 5 percent of RM15,000,000. Interest expense charged will
not same by years hence the rate still remains at 8 percent but the carrying amount changes

from year by year. This amount is amortized over the loan term and the liability is increased

year by year.
Dr Cr

RM RM

1 January 2019
Proceeds from issue of debentures

Bank 13,500,000

5% debentures 13,500,000
(Discount of 10%)

5% debentures 350,000
Bank 350,000

(paid transaction cost)

31 December 2019

Interest expenses (RM13,150,000 x 8%)
Bank (RM15,000,000 x 5%) 750,000

5% debentures 302,000

(Interest paid for first year)

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