Debenture Journal Entries and Financial Analysis

Liabilities Part 2
Tutorial Practice Revision

Question 1:

On 1 July 2008 Coledale Ltd issued $10 million in five year debentures that pay interest each six months at a coupon rate of 8%, with the first interest payment due on 31 December 2008. The debentures will mature on 30 June 2013, which is also the date of the final interest payment. At the time of the issue of the debentures, the market rate of return is 10%. Any discount or premium on issue is to be amortised on a straight line basis.

Required:
(i) Determine the issue price of the debenture, calculate any premium or discount and the amount of any related annual amortisation. Present value tables are included at the end of this paper. Show workings.
(ii) Provide the journal entries in the accounts of Coledale Ltd on the following dates:
1 July 2008.
30 June 2013.

Question 2. Flight Centre Ltd:

Provide answers to the following questions from the 2009-2010 Financial Report of Flight Centre Limited. Provide details of references in the report.
a) What were the beginning and ending balances of Provision for Long Service Leave in Flight Centre's financial statements?
b) Explain the increase in the balance for Long Service Leave.
c) To whom are Flight Centre Ltd share options available and how are they accounted for? How many options were outstanding at 30 June 2010? How many options were exercised during the year ended 30 June 2010, by whom, when, and for how much?
d) The Current Ratio is defined as Current Assets/Current Liabilities. Calculate the Current Ratio for Flight Centre Ltd as at 30 June 2010 and explain what it means.
e) What was Flight Centre's Debt to Asset ratio at 30 June 2010? Explain the significance of this.

Question 3. Critical Thinking:

Answer the questions relating to each of these 3 ASIC articles:
a) ASIC (05-30): "ASIC action protects vulnerable investors in high-yield debentures" - available at http://www.asic.gov.au/asic/asic.nsf/byheadline/05-30+ASIC+action+protects+vulnerable+investors+in+high-yield+debentures?openDocument

Required:
Provide a brief discussion of ASIC's investigation into high-yield debentures, outlining the reasons it launched an investigation, the concerns it identified and the action it took. Reflect in your answer on ASIC's role in protecting investors.

b) ASIC (05-290): "Fincorp to offer millions in refunds to debenture investors" - available at http://www.asic.gov.au/asic/asic.nsf/byheadline/05-290+Fincorp+to+offer+millions+in+refunds+to+debenture+investors?openDocument

Required:
Outline the terms of issue of Fincorp's debenture issue, the action ASIC took, the outcome for Fincorp and its investors and the implications for other companies issuing debentures.

c) ASIC (10-132AD): "ASIC strengthens disclosure requirements for debentures and unsecured notes" - available at http://www.asic.gov.au/ASIC/asic.nsf/byHeadline/10-132AD%20ASIC%20strengthens%20disclosure%20requirements%20for%20debentures%20and%20unsecured%20notes?opendocument

Required:
Identify the changes that ASIC introduced in its June 2010 update to debenture and unsecured notes requirements, identifying the reasons for the changes. Comment in your answer on the tension between the responsibilities of investors, companies issuing debentures and regulators.