Question
Redstone Energy issued bonds below face value and amortises the discount using the straight-line method.
| Date | Event |
|---|
| January 1, 2026 | Issued $100,000 of 5-year, 6% bonds at 96 (i.e. for $96,000). Interest is paid annually on December 31. |
| December 31, 2026 | Paid the annual interest and amortised the discount. |
Required: Prepare the issuance entry and the December 31 interest entry. Annual cash interest is $6,000; the discount amortisation is $4,000 ÷ 5 = $800, so interest expense is $6,800.
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.