Spoton Co Ltd issues $5 million in 2-year,8%,semi-annual coupon debentures to the public.The market required rate of return is also 8%.The money is received on application and the debentures are allotted on the same day: 30 June 2013.What are the journal entries to record (a)the receipt of funds and allotment of debentures on 30 June 2013,(b)the payment of interest on 31 December 2013 and (c)the redemption of the debentures on 30 June 2015?

Question

Quizplus · Accepted Answer

(a) Receipt of funds and allotment of debentures: 
Cash DR: $ 5,000,000 
Debentures CR: $ 5,000,000 
(b) Payment of interest: 
Interest Expense DR: $ 200,000 ($5,000,000 x 8% x 6/12) 
Interest Payable CR: $ 200,000 
(c) Redemption of debentures: 
Debentures Payable DR: $ 5,000,000 
Premium on Debentures DR: $ 491,991 ($5,000,000 - $4,508,009) 
Cash CR: $ 5,491,991 ($5,000,000 + $491,991) 
Therefore, Choice C is the correct option.

Spoton Co Ltd Issues $5 Million in 2-Year,8%,semi-Annual Coupon Debentures