ACC202 Journal Entries To Record Transactions of Windsor Company Assignment 1 Answer

ACC202 “Corporate Accounting”

Assignment 1

Windsor Company prepares semi-annual financial statements on 31 December and 30 June of each year. Windsor issued 5-year, 14 per cent bonds with a $300,000 face value, for $300,000. The bonds are dated on 31 October 2019, call for semi-annual interest payments on 30 April and 31 October, and mature in 5 years on 31 October Windsor made the required interest and principal payments when due.

Windsor Company applies International Financial Reporting Standards (IFRS). Effective Interest Rate (EIR) is the rate that exactly discounts estimated future cash flows through the expected life of the financial asset/liability to the gross carrying amount of a financial asset or to the amortised cost of a financial liability. Windsor Chief of Accounts commented that the effective interest method is the method that is used in the calculation of the amortized cost of a financial asset/liability and in the allocation and recognition of the interest revenue or interest expense in P/L over the relevant period.

Required:

Prepare necessary journal entries to record transactions on the following dates:
31 October 2019
31 December 2019
30 April 2020
31 October 2024
Re-do the journal entry on date of issuance if the bonds were issued at $250,000 instead? Explain journal entries involved in amortizing the discount/premium as required by IFRS 9?
When would preferred shares be a better investment choice than bonds? Refer to relevant IFRS when appropriate?

Answer

Working Notes

Date	Particulars	Debit	Credit
31.10.19	Bank A/c Dr.	300000
	To Bond Liability A/c		300000
	(Being bond issued)

31.12.19	Interest A/c Debit	7000
	To Outstanding Interest, A/c		7000
	(being interest recorded)

30.04.2020	Interest A/c Dr.	14000
	Outstanding Interest A/c Dr.	7000
	To Bank A/c		21000
	(Being First held Year interest recorded and paid)

31.10.2024	Interest A/c Dr.	21000
	To Bank A/c		21000
	(Being interest of last half year is recorded and paid)

31.10.2024	Bond Liability A/c Dr.	300000
	To Bank A/c		300000
	(Being bond liability settled)

2)

Calculation of effective interest rate

Time period	Cash flow
0	250000
1	-21000
2	-21000
3	-21000
4	-21000
5	-21000
6	-21000
7	-21000
8	-21000
9	-21000
10	-21000
10	-300000
EAR	9%

The effective annual interest rate is 9 % per half year, it is the rate at which interest is calculated on the outstanding bond liability (Komrattanapanya, & Suntraruk, 2013).

Date	Particulars	Debit	Credit
31.10.19	Bank A/c Dr.	250000
	Discount on bond issued Ac Dr.	50000
	To Bond Liability A/c		300000
	(Being bond issued)

3)

The shares and bonds are two different options for fund raising, the option that one should go with the shares instead of the bonds are based on certain factors (Valaskova, Kliestik, & Kovacova, 2018).

When the unleveraged firm provides a better value addition to the value of the stakeholders if compare with the leveraged firm. The shareholders dilution does not affect the decision of the companies than it is better to raise funds with the stocks as compare to the bonds (Waemustafa, & Sukri, 2016).
In bond liability there is a permanent liability to pay the interest outflow after a certain interval irrespective of the profit earned by the company, thus the bonds create a fix liability to the company, in stocks there are no such fix liability that the company have to borne. Thus the company needs to prefer the stocks as compare to the bonds after analysing the above facts (Waemustafa, & Sukri, 2016).

Working Notes

Date	Particulars	Debit	Credit
31.10.19	Bank A/c Dr.	300000
	To Bond Liability A/c		300000
	(Being bond issued)

31.12.19	Interest A/c Debit	7000
	To Outstanding Interest, A/c		7000
	(being interest recorded)

30.04.2020	Interest A/c Dr.	14000
	Outstanding Interest A/c Dr.	7000
	To Bank A/c		21000
	(Being First held Year interest recorded and paid)

31.10.2024	Interest A/c Dr.	21000
	To Bank A/c		21000
	(Being interest of last half year is recorded and paid)

31.10.2024	Bond Liability A/c Dr.	300000
	To Bank A/c		300000
	(Being bond liability settled)

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ACC202 Journal Entries To Record Transactions of Windsor Company Assignment 1 Answer

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