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BDX company issues $ 15 million of five-year, 6
BDX company issues $ 15 million of five-year, 6.5 per cent, semi-annual coupon debentures to public which pay interest each six months. The market also requires a rate of return of 6.5 per cent. Assume that the moneys come in and the debentures are allocated on the same day, 30th June, 2019.
Required:
Provide the accounting entries at 30th June, 2019, 31st December, 2019 and 30th June, 2024 to record:
- (a) The receipt of funds. (2 marks)
- (b) The first payment of interest (2 marks)
- (c) The redemption of the debentures (2 marks)
- (d) In your own words, explain how you would determine the discount or premium on a
debenture issue? (1 mark)
Expert Solution
Journal Entries:
| No. | Date | Account titles and explanation | Debit | Credit |
| a. | 30-Jun-19 | Cash | $15,000,000 | |
| 6.5% Debentures | $15,000,000 | |||
| (Being Cash received for issue of debentures) | ||||
| b. | 31-Dec-19 | Interest on Debentures ($15,000,000*6.5%*6/12) | $487,500 | |
| Cash | $487,500 | |||
| (Being Interest Paid) | ||||
| c. | 30-Jun-24 | 6.5% Debentures | $15,000,000 | |
| Cash | $15,000,000 | |||
| (Being debentures redeemed) |
|
Note: Since market rate and coupon rate of interest of the debentures are same The issue price itself is the carrying value. |
d)
1) Issue of Debenture at Par value.
Debentures are said to be issued at par value when the amount collected for it is equal to the nominal value (face value) of the debentures.
2) Issue of debenture at Premium value.
When Debentures are issued at a price higher than the nominal value, it is called the 'Issue of Securities at Premium'.
3) Issue of Debenture at Discount value.
When debentures are issued by the company at a price less than its nominal value (face value) it is said to be issued at discount.
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