Question

You are the Chief Finance officer for Manzi Limited, A company engaged in construction of apartments for third parties. Mazembe has 200 employees in total and the following transactions have arisen that require you advise on how they should be reported.

As a way of growing its funds raised from construction of apartments, Mazembe acquired an investment in a debt instrument on 1 January 2019 at its par value of K9 million. Transaction costs relating to the acquisition were K500,000. The investment earns a fixed annual return of 6% which is received in arrears. The principal amount will be paid to Mazembe in four years’ time at a large premium. Mazembe’s business model is to hold the investment until redemption date. The investment has an effective interest rate of approximately 7.05%.

On 31 December 2019, Mazembe received its fixed interest. However, it estimated that the probability of default on the bond within the next 12 months would be 0.8%. if default occurs within the next 12 months, Mazembe estimates that no further interest would be received and that only 30% of capital will be repaid on 31 December 2022.                                                                   

Required:

Discuss in detail, with relevant computations, the required accounting treatment of each of the above transactions for the year ended 31 December 2019. Summarize your discussion on each item in financial statement extracts.

Answer 1