Finance and Accounting Homework: Debentures and Accounting Standards

This homework assignment provides solutions to several financial accounting problems. The first part addresses violations of accounting standards AASB 116 and AASB 138, discussing the improper capitalization of repair and maintenance costs and the incorrect valuation of intangible assets. The solution explains the correct treatment of these items, emphasizing the impact on financial statements and the implications of window dressing. The second part focuses on debentures, explaining how market interest rates affect their pricing (premium or discount). It includes journal entries for bond issuance at a discount, interest payments, and the amortization of the discount over the life of the bond. The solution details the calculations and accounting treatment for each transaction, ensuring a clear understanding of the concepts involved. This assignment offers valuable insights into financial reporting and debenture accounting.

Solution-1
Sr. No. Issue/Concern Conclusion Reference Ju
1 The manager of Golf
Gear often debits the
cost of repair or
maintenance of
equipment to Plant and
equipment.
Yes, debiting cost of repairs or
maintenance of equipment to Plant
and equipment is a violation of
accounting standard AASB 116
“Property, Plant & Equipment” as
it fails to meet the recognition
criteria prescribed under standard.
As per AASB 116 -“The cost of
an item of property, plant and
equipment shall be recognized
as an asset if, and only if:
(a) it is probable that future
economic benefits associated
with the item will flow to the
entity; and
(b) the cost of the item can be
measured reliably.”
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2 The manager of Castle
Industries often buys
plant and equipment
and debits the cost to
Repairs and
maintenance expense.
Yes, purchasing Property, Plant &
Equipment and debiting its cost to
repairs and maintenance is a
violation of accounting standard
AASB 116 “Property, Plant &
Equipment” as well as accepted
good practice.
(a) As per the recognition
Criteria of AASB 116:
“The cost of an item of property,
plant and equipment shall be
recognized as an asset if, and
only if: (a) it is probable that
future economic benefits
associated with the item will
flow to the entity; and (b) the
cost of the item can be measured
reliably.”
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3 Some people suggest
that, since many
intangible assets have
no value except to the
business that owns
The view that intangible assets
should be recognized at $1 or $0
is not a valid view.
As per AASB 138 “Intangible
Assets”, any intangible that has
expected future economic
benefits to the entity should be
recognized as an asset and these
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them, e.g. the website,
they should be valued at
$1.00 or zero on the
balance sheet.
types of intangibles should be
recorded at cost. And if the asset
is created or acquired at no cost
or for a nominal cost, the asset
should be recorded at fair value
on the transaction date (i.e.
acquisition date or its creation
date).
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Solution-2
(a) If on the issue date, the market interest rate is 6.5% and the debentures are issued at 7%
then the debentures will be priced at a premium. As a common thought, the investors will invest
in the instruments which give them higher rate of return as they want to earn more. In this case,
in the market, the instruments are offering 6.5% and the debentures are offering 7%, i.e. greater
than market price. So, by investing $500,000 in other instruments, investors will earn $32,500
p.a. whereas by investing in debentures they will earn $35,000, so, they will earn more by
$2,500. Hence the debentures will become more valuable and it will increase the price of
debentures.
(b) If on the issue date, the market interest rate is 8% and the debentures are issued at 7%
then the debentures will be priced at a discount. As a common thought, the investors will invest
in the instruments which give them higher rate of return as they want to earn more. In this case,
in the market, the instruments are offering 8% and the debentures are offering 7%, i.e. less than
the market price. So, by investing $500,000 in other instruments, investors will earn $40,000 p.a.
whereas by investing in debentures they will earn $35,000, so, they will earn less by $5,000.
Hence the debentures will become less valuable and it will decrease the price of debentures.
(c) Journal entries

Date Particulars Debit
1 March 2017 Cash
Discount on bonds payable
To Bonds Payable
(Bonds issued at a discount)
475,00
25,00
31 August 2017 Interest Expense
To Cash
To Discount on Bonds Payable
(Payment of interest and amortization of bonds recorded)
18,12
31 December 2017 Interest Expense
To Interest payable
To Discount on Bonds Payable
(Interest due and amortization of bonds recorded for 4 months)
12,08
28 February 2018 Interest Expense
Interest Payable
To Cash
To Discount on Bonds Payable
(Payment of interest and amortization of bonds recorded for 2
months)
6,04
11,66
Semi-annual interest payment = $500,000 x 7% / 2 = $17,500
The total discount of $25,000 is amortized over 20 years. Since interest is paid twice a year, the
amount of discount amortized at the time of each interest payment = $25,000 /(20*2)= $625