Question
You are reviewing the liabilities of Saltmarsh Marine before its December 31, 2026 accounts are finalised. No adjusting entries have been made yet.
- On September 1, 2026 Saltmarsh borrowed $80,000 on a 9% note. Principal and interest are due on August 31, 2027. No interest has been recorded.
- Saltmarsh's bonds (face value $100,000, 5% coupon paid each December 31) had a carrying amount of $95,000 on January 1, 2026 and an effective interest rate of 6%. The December 31 coupon was recorded as a $5,000 debit to Interest Expense and a credit to Cash. Nothing else has been recorded for the bonds.
- After this year's claims, the warranty provision has a balance of $2,000. The provision required at year end is $6,000.
- A customer is suing over a faulty hull repair. An outflow is probable, and the single most likely outcome is a payment of $25,000. Nothing has been recorded.
Required:
- Adjusting Entries — every adjusting entry required at December 31, 2026. Use Interest Expense, Interest Payable, Bonds Payable, Warranty Expense, Warranty Provision, Litigation Expense and Provision for Litigation.
- Finance Costs — total finance costs in profit or loss for 2026, including the coupon already recorded.
- Bond Carrying Amount — the carrying amount of the bonds at December 31, 2026.
- Statement Impact — the combined effect of your adjusting entries.
Statements in this challenge
- Adjusting EntriesJournal Entry
- Finance CostsNumeric Answer
- Bond 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.