Question
Keystone Industries issued bonds to finance an expansion.
| Date | Event |
|---|
| January 1 | Issued $200,000 of 6%, 5-year bonds at par (face value). Interest is paid semiannually on June 30 and December 31. |
| June 30 | Paid the semiannual bond interest. |
| December 31 | Paid the semiannual bond interest. |
Required: Prepare the journal entries for the bond issue and both semiannual interest payments. Each interest payment is $200,000 × 6% × 6/12.
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.