Question

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

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.

Q 3 interest = $ 40 mn X 4.10% X ¼ = 0.41 million

The relevant journal are :

Date	Particulars	Debit ($)	Credit ($)
July1 2018	Cash	39,440,000
	Discount on issue	560,000
	4.10% short term paper		40,000,0000
	(To record issuance of short term paper)
	Short term paper issuance expense	640,000
	Cash		640.000
	(To record fees and commissions for issuance)
Sep 30 2018	Interest expense (40X4.1% X ¼)	410,000
	Cash		410,000
	(To record interest expense)

Instead of cash, bank can be entered.