Question
On January 1, 2026 Pellbrook Utilities issued $500,000 of 5-year, 8% bonds. Interest is paid semiannually on June 30 and December 31. The market rate for bonds of similar risk was 6%, so the bonds sold for $542,651.
Pellbrook amortizes the premium using the effective-interest method and records it in a separate Premium on Bonds Payable account. Round each interest figure to the nearest dollar.
Required: Record the issuance on January 1 and the interest payments on June 30 and December 31, 2026.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IFRS 9 — financial liabilities at amortised cost
A bond issued at a discount or premium is carried at amortised cost using the effective interest method: interest expense is the carrying amount multiplied by the effective rate, while the cash paid is the face amount multiplied by the coupon rate. The difference amortises the discount or premium.
Common mistakes
- Recording interest expense equal to the cash coupon and never amortising the discount or premium.
- Applying the effective rate to the face value rather than to the opening carrying amount.
- Amortising straight-line where the effective interest method is required.