Romeo Ltd is a South African company with the South African rand (R) as its functional and presentation currency. On 1 January 2023, the company purchased debentures issued by Alpha plc, a company incorporated in the United Kingdom. Zoom Ltd paid £100 000 (fair value) for the debentures on 1 January 2023, which will be redeemed for £120 000 on 31 December 2026.
The debentures pay interest annually on 31 December at a coupon rate of 9% per annum, on a face value of £100 000. On 1 January 2023, the debentures were not credit-impaired. The fair value of the debenture on 31 December 2023 was £105 000. The debentures are classified as at fair value through other comprehensive income.
The relevant exchange rates are as follows:
1 January 2023
£1 = R18
31 December 2023
£1 = R19
Required:
a. Calculate the effective interest rate to be used by Romeo Ltd on the Debentures.
(10 Marks)
Do not make use of spaces or R-signs when entering amount (example use: 12000 or -12000). Round off your answer to 2 decimal points
PV: £ Answer 1 Question 2
-100000
Pmt: £ Answer 2 Question 2
9000
N: Answer 3 Question 2
4
years
FV: £ Answer 4 Question 2
120000
then I/Yr: Answer 5 Question 2
13.12
%
b. Calculate any fair value adjustment to the debentures on 31 December 2023 in the statement of financial position of Romeo Ltd.
(14 Marks)
Initial investment
£Answer 6 Question 2
100000
Interest
£Answer 7 Question 2
13120
Payment
£ Answer 8 Question 2
Balance in £
£ Answer 9 Question 2
104120
X spot at year end
R Answer 10 Question 2
Balance in SFP
R Answer 11 Question 2
Adjustment: in investment required
R Answer 12 Question 2