Page 17 - Chapter 23 - Interest

Example: Interest-bearing Instruments

IRFS Ltd (30 June year-end) required funding to buy a new asset. To obtain

finance, IRFS issued a debenture to RE Ltd (31 March year-end).

(IRFS = issuer - pay interest; RE = holder - receive interest)

The debenture has the following terms:

The debenture was issued on 1 January 2014.

The nominal amount of the debenture is R1 million.

Because IRFS is experiencing difficulties, there will only be one interest payment
of R100 000 on 31 December 2014.

The debenture will be settled on 31 December 2015 at a premium on the nominal
amount at an amount of R1,15 million.

The yield to maturity rate is 12.35%

The asset was purchased and brought into use on 1 March 2014.

REQUIRED

Calculate taxable income for 2014 and 2015 YOA for IRFS and RE