QUT Business School
School of Accountancy

LIABILITIES I
BASED ON LECTURE 6
Due Date: Week 7 (15 April 2015)
PRACTICAL QUESTION:
On 1 July 2014 Kiama Ltd issues $2 million in six-year debentures that pay interest each six months at a coupon rate of 8 per cent. At the time of issuing the securities, the market requires a rate of return of 6 per cent. Interest expense is determined using the effective interest method.
Required:
(a) Determine the issue price of the debentures. Show workings. (7 marks)
Cash Flow
Discount Factor
Workings
PV
Interest
$80,000
($2,000,000 x 4%)
Annuity over 12 payments at 3%
=9.9540
$80,000 x 9.9540

796,320
Principal
$2,000,000
PV of $1 in 12 periods at 3%
=.7014
$2,000,000 x .7014
1,402,800
Total PV

2,199,120
(b) Construct a schedule in the format indicated below. Show the periodic interest expense over the entire life of the debentures, using the effective interest method.
(6 marks)

Period
Date
Opening Liability Balance
Interest Expense (3%)
Cash Payment
Reduction in liability
Closing Liability Balance
0
01/07/2014

2,199,120
1
31/12/2014
2,199,120
65,974 80,000 14,026
2,185,094
2
30/06/2015
2,185,094
65,553
80,000 14,447
2,170,646
3
31/12/2015
2,170,646
65,119
80,000 14,881
2,155,766
4
30/06/2016
2,155,766
64,673
80,000 15,327
2,140,439
5
31/12/2016
2,140,439
64,213
80,000 15,787
2,124,652
6
30/06/2017
2,124,652
63,740
80,000 16,260
2,108,391
7
31/12/2017
2,108,391
63,252
80,000 16,748
2,091,643
8
30/06/2018
2,091,643
62,749
80,000 17,251
2,074,393
9
31/12/2018
2,074,393
62,232
80,000 17,768
2,056,624
10
30/06/2019
2,056,624
61,699
80,000 18,301
2,038,323
11
31/12/2019
2,038,323
61,150
80,000 18,850
2,019,473
12
30/06/2020
2,019,473
60,527**
80,000 19,473**
2,000,000
**Includes balancing figure of $57 (i.e. 19,416 + 57).
(c) Provide journal entries at the following dates (Note: narrations are not required):
(7 marks)
1 July 2014
30 June 2015
30 June 2020

1st July 2014
Cash at Bank (DR) $2,119,120 Debentures (CR) $2,119,120
30th June 2015
Interest Expense (DR) $65,533
Debentures (DR) $14,447 Bank (CR) $80,000
30th June 2020 Interest expense (DR) $60,527 Debentures (DR) $19,473 Bank (CR) $80,000
30th June 2020
Debentures (DR) $2,000,000 Bank (CR) $2,000,000 TOTAL MARKS FOR PRACTICAL QUESTION: 20
Critical Thinking Question:
Background: At its London Summit in 2009, after the Global Financial Crisis of 2007-2008, the G20 proposed a number of strategies to strengthen financial supervision and regulation. These included a call to accounting standard setters “to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards” (BBC News, 2009, http://news.bbc.co.uk/2/hi/business/7979606.stm ).
Response: The International Accounting Standards Committee Foundation responded to this call with a letter to G20 participants dated 16 September 2009 (here: http://www.ifrs.org/News/Press-Releases/Pages/Trustee-letter-to-G20-participants.aspx or at Blackboard/Learning Resources/Additional Documents & Reports).
Required:
Access the G20 proposals and the IASC Foundation’s letter and address the following statement using the AREA Framework.
The pro-regulation approach of both the G20 and the IASC Foundation, while claiming to be in the public interest, is designed to support the economic agenda of powerful interest groups.
In your answer refer to the regulatory theories identified by Deegan