(b) Kappa prepares financial statements to 30 September each year. During the year ended 30 September 2016 Kappa entered into the following transactions:

(ii) On 1 October 2015, Kappa made a three-year loan of $10 million to entity X. The rate of interest payable on the loan was 8% per annum, payable in arrears. On 30 September 2018, Kappa will receive a fixed number of shares in entity X in full settlement of the loan. Entity X paid the interest due of $800,000 on 30 September 2016 and entity X has no liquidity problems. Following payment of this interest, the fair value of this loan asset at 30 September 2016 was estimated to be $10·5 million. (4 marks)

Required:
Explain and show how the above transactions would be reported in the financial statements of Kappa for the year ended 30 September 2016.

Note: The mark allocation for part (b) is shown against each of the three transactions above.