Question

Problem #2 (30): On July 1, 2018 GIFFCO contracted with the investment bank X. M. Retzoff et freres to issue $40 m of short-term paper at 98.6. The securities have a two-year maturity, carry a 4.10% coupon rate, and pay at the end of each quarter. Fees and commissions to Retzoff and GIFFCO's accountants came to $640,000. Required: Book the issue and the 2018 Q 3 interest accrual.

Answer 1

Answer:-

In this given problem,the bonds has been issued at discount. Hence, there is discount of $ 40 X 98.6% = $ 39.44 million. This discount on issue of expense shall be amortized over the period of bond.

The fees and commissions shall be paid. It shall decrease the cash receipt in issue eventually.

Quarter 3 (Q3)interest = $ 40 M X 4.10% X ¼ = 0.41 million

Relevant journal Entries given below:-

Date	Particulars	Debit ($)	Credit ($)
July1 2018	Cash/Bank	39,440,000
	Discount on issue	560,000
	To 4.10% short term paper		400,000,000
	(Being entry passed for issuance of short term paper)
	Short term paper issuance expense	640,000
	To Cash/Bank		640
	(being entry passed for fees and commissions for issuance)
Sep 30 2018	Interest expense (40X4.1% X ¼)	410,000
	To Cash/Bank		410,000
	(being interest expense paid)