FAR160

( TOPIC: ISSUE OF DEBENTURES)

Debt Instrument

Redeemable
Debentures Bond Preference Shares
(Next topic)

Debentures are secured to a certain assets of a company in order to secured the debenture
holders

2 types of charge
against the debentures

Fixed charged Floating charged

A debt that issued A group of assets

against a spesific signed over to
assets usually secured the
property debentures holder eg.
MV, F&F, stocks etc

1
 Issuance of
Debentures

At discount At
At par
premium
lower than nominal value
eg. Issue at 92 above its nominal value
Discount = 8% x Nominal Value eg. Issue at 110
(ie Discount = 100%- 92% = 8%) Premium = 110 -100 =10%
Premium =10% x Nominal
Value
its nominal
value
eg.issue at 100

Transaction cost
When debentures are issued, the company will incur transaction cost @ issue costs such as
consultancy and legal fees.

After initial recognition

2
 Debentures should be
measured at

Amortised cost
Fair value

* Transaction cost is deducted from

the liability
Nominal value xx
Less: Discount (xx)
Less: Issue cost / (xx)
transaction cost
Proceeds xx

Examples
1) 1 January 2018, company issued 6% debentures of nominal value RM15,000,000 at
discount of 10 percent.
2) Transactions cost amounted to RM300,000
3) Debentures will be redeemed at par value.
4) Effective interest rate is 8% interest date is 31 December.
Solution
1 January 2018 (Initial recognition) calculate amount (proceed) received from issue of
debentures.
W1:
Nominal value = 15,000,000
Less Discount (10% x 15,000,000) = (1,500,000)
Less: Transaction cost = (300,000)
Proceeds 13,200,000

OR PROCEEDS = (90% X 15,000,000) – 300,000 = 13,200,000

After Discount

3
Journal Entries
To record proceeds / receipt and increase in liability:
Dr Bank (W1) 13,200,000
Cr 6% debentures 13,200,000

After initial recognition

On 31 December 2018 (Finance Cost)
Dr Finance cost or Interest expense (SOPL) (W2) 1,056,000
Cr Bank (W3) 900,000
Cr 6% Debentures 156,000

w2 Finance cost = Proceeds x Effective rate x n/12

n = duration from issue date until year end
w2; RM13,200,000 X 8% x 12/12 = 1,056,000

Proceed Effective interest rate @ market rate

(Balance in debenture a/c)

W3:Payment by bank based on Interest rate of debenture x Nominal Value x n/12

Bank = 6% × 15,000,000 x 12/12
= 900,000
Difference between effective rate and interest rate of debenture will be credited to
debenture a/c.
(1,056,000 – 900,000)
= 156,000

2nd year : 31 December 2019

Dr Interest expense (finance cost-SOPL) (W4) 1,068,480
Cr Bank 900,000
Cr 6% Debentures 168,480

Difference of 168480 is the balance on effective/market rate and interest on debentures

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W4: Balance in the debenture a/c × effective rate
[13,200,000 + 156,000 = 13,356,000]
= 13,356,000 × 8%
= 1,068,480

# payment by Bank a/c will always based an interest rate of debenture

= 6% × nominal value
= 6% × 15,000,000
= 900,000

(COMMON TEST) April 2019 / Question 2 GOLDEN ROD BHD

workings
OSC (in units)
Apply ?
LESS: Issue 800,000
Oversubscribed 200,000
Issue price RM2.20

8% PSC (in units)

Apply ?
less Issue / offer 400,000
Undersubscribed (100,000)

Accept all applications

Issue price RM2.60

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 JOURNAL -Golden Rod Bhd
Issue OSC
Dr Bank (1,000,000 × RM2.20) 2,200,000
Cr Ordinary Shares Application - OSA 2,200,000

Dr Ordinary Shares Application - OSA 440,000

Cr Bank (refund) 440,000

Dr OS Application a/c 1,760,000

Cr Ordinary Shares Capital - OSC 1,760,000
(800,000 × RM2.20)

Issue PSC
Dr Bank (300,000 × RM2.60) 780,000
Cr Preference Shares Application - PSA 780,000

Dr Preference Shares Application -PSA 780,000

Cr Preference Shares Capital - PSC 780,000

Bonus Share
Dr Retained profit 135,000
Cr Bonus share (90,000 × RM1.50) 135,000

Dr Bonus share 135,000

Cr Ordinary Share Capital - OSC 135,000

WORKINGS FOR BONUS ISSUE OR BONUS SHARE

20 shares => 1 Bonus issue
1,800,000 shares => 1,800,000/ 20

Only OSC => 90,000 units of Bonus share

refer Statement of Financial position As at 31 Dec 2017
Equity RM
1,800,000 ordinary share @ 2,700,000

RM 2,700,000
Price per unit of OSC =
units 1,800,000

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= RM1.50

Issue debentures (WORKINGS)

Issue Debenture on 1 October 2018

Nominal value = 200,000
- Discount (200,000 × 0.05) = (10,000)
- Issuance cost = (10,000)
Proceed 180,000

OR: PROCEEDS = ( 95% x 200,000) – 10,000 = 180,000

ANSWER: JOURNAL 1 Oct 2018 (initial recognition)

Dr Bank , w1 180,000
Cr 7% Debentures 180,000

31 December 2018 (after initial recognition)

Dr Finanace cost (SOPL), w2 4,500
Cr Bank, w3 3,500
Cr 7% Debentures 1,000

Diff. betw. effective rate and interest rate

Calculation finance cost / interest expense

(10% × 180,000 × 3/12) = 4,500
Proceed
Effective market rate
Debenture issued oct (only 3 months)

Bank => amount of interest company pay to debenture holders

7% × nominal value x duration

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= 7% × 200,000 × 3/12
= 3,500

b) ANSWER:
Golden Rod Bhd
Statement of Financial position (extract) as at 31 December 2018
Equity RM
2,690,000 OSC 4,595,000
1,500,000 8% PSC 3,180,000

Reserves
Retained profit 1,180,000
General reserves 360,000

Non Current Liabities

7% Debentures (180,000 + 1,000) 181,000

Proceed 31/12/2018
WORKINGS:
Units of OSC
Bal b/d 1,800,000
New shaares 800,000
Bonus shares 90,000
2,690,000
Units of PSC
Bal b/d 1,200,000
New shares 300,000
1,500,000

WORKINGS: SOFP Golden Rod Bhd

Units of OSC RM
Value of OSC
Bal b/d 1,800,000 = 2,700,000
New shares 800,000 = 1,760,00
Bonus share 90,000 = 135,000

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 RM 4,595,000

Value of 8% PSC

Units of 8% PSC
Bal b/d 1,200,000 RM 2,400,000
New shares 300,000 RM 780,000
3,180,000

Retained Profit
Bal b/d 1,320,000
Less: issue Bonus share (utilise) (135,000)

Less: Finance cost (4,500)

(Interest on debentures )

RM1,180,500