a) Edjaz Ltd issued 6% Rs20,000 debentures on 1st April 2019 at a discount of

10%. Issue costs amounted to Rs1,000. The debentures will be redeemed at

a premium of Rs1015 above par value. Interest payments (equivalent to
nominal rate of 6% per annum levied on the nominal value of Rs20,000)
are effected every 31 March. The effective rate of interest is 12% per
annum. The discount of Rs2000 on issue together with the issue costs have
been expensed to the profit and loss for the year and included in
administrative expenses. Edjaz Ltd has a 31 March year end.

Required:

(i) Explain why the effective rate of interest is much higher than the
nominal rate of interest. (2 marks)
(ii) State the carrying amount of the debentures in the balance sheet of
Edjaz Ltd at 31 March 2020 and explain whether this figure is
correct. (2 marks)
(iii) Using the provisions of IFRS 9, state the revised carrying amount of
the 6% Debentures at 31 March 2020. (2 marks)

(iii) Revised carrying amount of the debentures in the balance

sheet of the company at 31 March 2020: Initial recognition of
Rs17,000 plus interest cost of RS2040 (17000 x 12%) minus
amount paid of Rs1200 = Amortised cost of Rs17,840.

 Dr Debentures RS3000 Cr Administration expenses Rs3000

 Dr Finance cost 840 (i.e. 2040 -1200) Cr Debentures 840

Year Due at Interest at paid at Due at end

start end (based end (amortised cost)
on effective
r of 12%)
31 17000 2040 1200 17840 1 mark

March
2020
31 17840 2141 1200 18,781

March
2021

Tutorial notes

 The effective interest method is a method of calculating the amortised cost of a financial
instrument and of allocating and recognizing the interest income or interest expense in
profit or loss over the relevant period.
 The effective interest rate is the rate that exactly discounts estimated future cash payments
or receipts through the expected life of the financial instrument to the gross carrying
amount of a financial asset or the amortised cost of a financial liability (IFRS 9)