1 answer

Problem #2 (30): On July 1, 2018 GIFFCO contracted with the investment bank X. M. Retzoff...

Question:

Problem #2 (30): On July 1, 2018 GIFFCO contracted with the investment bank X. M. Retzoff et freres to issue $40 m of short-t

Problem #2 (30): On July 1, 2018 GIFFCO contracted with the investment bank X. M. Retzoff et freres to issue $40 m of short-term paper at 98.6. The securities have a two-year maturity, carry a 4.10% coupon rate, and pay at the end of each quarter. Fees and commissions to Retzoff and GIFFCO's accountants came to $640,000. Required: Book the issue and the 2018 Q 3 interest accrual.

Answers

Answer:-

In this given problem,the bonds has been issued at discount.

Hence, there is discount of $ 40 X 98.6% = $ 39.44 million. This discount on issue of expense shall be amortized over the period of bond.

The fees and commissions shall be paid. It shall decrease the cash receipt in issue eventually.
Quarter 3 (Q3)interest = $ 40 M X 4.10% X ¼ = 0.41 million

Relevant journal Entries given below:-

Date Particulars Debit ($) Credit ($)
July1 2018 Cash/Bank         39,440,000
Discount on issue               560,000
        To 4.10% short term paper         400,000,000
(Being entry passed for issuance of short term paper)
Short term paper issuance expense               640,000
      To Cash/Bank                         640
(being entry passed for fees and commissions for issuance)
Sep 30 2018 Interest expense (40X4.1% X ¼)               410,000
         To Cash/Bank                 410,000
(being interest expense paid)
.

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