Question

On 1 January 2019, Oscar Ltd issued 10-year bonds with a face amount of $20,000,000 and a contract rate of 8%, with interest payable annually starting 1 January 2020. The effective interest rate on the date of issuance was 10%. Required: a) Prepare the journal entry for the bond issuance, and explain why the bonds will be issued at less than face value. b) Oscar Ltd has an annual accounting period ending on 31 March 2019 Prepare the adjusting entry required on that date. c) Prepare the journal entry for the first interest payment on 1 January 2020. (Hint: Do not forget about b).) d) Assuming the bonds are redeemed at maturity, what is the total amount of interest expense to be recognised over the life of the bonds? e) Assume the bonds are redeemed before maturity at an amount greater than their face value. Discuss if the market interest rate on the date of redemption was less than, equal to, or greater than the contract rate. Justify your answer using present value concepts. No calculations are required.. i. Assume that on the date of redemption, the carrying value of the bonds was less than the cash paid 1) Prepare the journal entry for the redemption, using XXX in place of figures. What follows, in an unrelated example, is what is meant by using XXX: XXX XXX Cash Loss on Sale of Land Land XXX 2) Should the gain/loss from the bond redemption be classified as Other Comprehensive Income? If not, why not?

Answer 1

Angwer Cay Face value - 30,000,00D Annual caupon Rate Annual caupon = &%X20pc0,00 Annual Coper 41600,000 (0 Amual inbeest ale maturity Time to TeSue Value -f 1600,000 XPVA (10%l0) + ¢a0000,000 Tesue Valuu 5 1600poo-14457+4 Q0,000,800x03855y Tsue Valuee f 17542112 The onds ae ssued at lan han faee Value becauset maskeb ate qinterest 1-e. l0% Aagher Coupon rate 4y Than he

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