Question
On January 1, 2026 Brindlecote Rail issued $200,000 of 3-year bonds with a 6% coupon paid annually on December 31. The market rate for bonds of similar risk was 8%. There were no transaction costs.
| Present-value factor at 8%, 3 periods | Factor |
|---|
| Present value of 1 | 0.793832 |
| Present value of an ordinary annuity of 1 | 2.577097 |
Under IFRS 9 the bonds are measured at amortised cost using the effective-interest method; the discount is not recorded in a separate account. Round to the nearest dollar.
Required:
- Issue Price — the cash received for the bonds.
- Journal Entries — the issue on January 1 and the interest payment on December 31, 2026. Use Bonds Payable, Interest Expense and Cash.
- Carrying Amount — the carrying amount of the bonds at December 31, 2026.
- Statement Impact — the effect of the December 31 interest entry.
Statements in this challenge
- Issue PriceNumeric Answer
- Journal EntriesJournal Entry
- Carrying AmountNumeric Answer
- Statement ImpactStatement Impact
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.