Spoton Co Ltd issues $5 million in 2-year, 8 per cent, semi-annual coupon debentures to the public. The market required rate of return is also 8 per cent. The money is received on application and the debentures are allotted on the same day: 30 June 2003. What are the journal entries to record (a) the receipt of funds and allotment of debentures on 30 June 2003, (b) the payment of interest on 31 December 2003 and (c) the redemption of the debentures on 30 June 2005?
E) None of the given answers.

Question

Quizplus · Accepted Answer

(a) To record the receipt of funds and allotment of debentures on 30 June 2003:

Cash Dr. $5,000,000
Debentures Cr. $5,000,000

(b) To record the payment of interest on 31 December 2003:

Interest Expense Dr. $200,000 ($5,000,000 x 0.08 x 1/2)
Interest Payable Cr. $200,000

(c) To record the redemption of the debentures on 30 June 2005:

Debentures Dr. $5,000,000
Premium on Debentures Dr. $95,243 [($5,000,000-$4,904,757) / 2]
Cash Cr. $5,095,243 ($5,000,000 + $95,243)

Spoton Co Ltd Issues $5 Million in 2-Year, 8 Per