Banshee Plc issues £12 million in 8-year,8%,semi-annual coupon debentures.The rate of return required by the market is 12%.What is the journal entry to record the first payment of interest assuming that Banshee uses the effective-interest method to amortise any discount or premium (round to the nearest pound)?
A) $$\begin{array} { | r | l | r | r | }
\hline \mathrm { Dr } & \text { Interest expense } & 574475 & \
\hline \mathrm { Cr } & \text { Debentures } & & 94475 \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$
B) $$\begin{array} { | l | l | r | r | }
\hline \mathrm { Dr } & \text { Interest expense } & 385525 & \
\hline \mathrm { Dr } & \text { Debentures } & 94475 & \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$
C) $$\begin{array} { | c | l | l | l | }
\hline \mathrm { Dr } & \text { Interest expense } & 636597 & \
\hline \mathrm { Cr } & \text { Debentures } & & 156597 \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$
D) $$\begin{array} { | c | l | r | r | }
\hline \mathrm { Dr } & \text { Interest expense } & 323403 & \
\hline \mathrm { Dr } & \text { Debentures } & 156597 & \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$

Question

Banshee Plc issues £12 million in 8-year,8%,semi-annual coupon debentures.The rate of return required by the market is 12%.What is the journal entry to record the first payment of interest assuming that Banshee uses the effective-interest method to amortise any discount or premium (round to the nearest pound)?
A) $$\begin{array} { | r | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 574475 & \
\hline \mathrm { Cr } & \text { Debentures } & & 94475 \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$
B) $$\begin{array} { | l | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 385525 & \
\hline \mathrm { Dr } & \text { Debentures } & 94475 & \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$
C) $$\begin{array} { | c | l | l | l | } 
\hline \mathrm { Dr } & \text { Interest expense } & 636597 & \
\hline \mathrm { Cr } & \text { Debentures } & & 156597 \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$
D) $$\begin{array} { | c | l | r | r | } 
\hline \mathrm { Dr } & \text { Interest expense } & 323403 & \
\hline \mathrm { Dr } & \text { Debentures } & 156597 & \
\hline \mathrm { Cr } & \text { Cash } & & 480000 \
\hline
\end{array}$$

Quizplus · Accepted Answer

The effective-interest method allocates the interest expense over the life of the debentures based on the carrying value of the debentures. The carrying value of the debentures is initially £12 million. The interest expense for the first period is £574,475 (rounded to the nearest pound), which is calculated as 12% x £12 million x 6/12. The interest expense is debited to Interest expense, and the carrying value of the debentures is credited. The difference between the interest expense and the cash payment of £480,000 is credited to Cash.

Banshee Plc Issues £12 Million in 8-Year,8%,semi-Annual Coupon Debentures B)