QUESTION 4 (15 MARKS) Wide Angle Bhd is constructing a new office building at a cost of RM2 million.When building is in the final stage of completion, Wide Angle Bhd faces financial difficulties as the company needs a fund amounted RM450,000 to complete the construction. The management team of Wide Angle Bhd decides to issue bonds instead of shares since that is a way to raise capital without diluting the current shareholders' equity. The RM450,000 of 8%, 5-year bonds were issued on 1 January 2019 and pay interest semi-annually on each 1 January and 1 July, which the payment is starting on July 2019. The market rate of bonds yield 6%. The financial year ends on 30 September. Wide Angle Bhd uses the effective interest method to amortize bond premium or discount.
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Question:
QUESTION 4 (15 MARKS) Wide Angle Bhd is constructing a new office building at a cost of RM2 million.When building is in the final stage of completion, Wide Angle Bhd faces financial difficulties as the company needs a fund amounted RM450,000 to complete the construction. The management team of Wide Angle Bhd decides to issue bonds instead of shares since that is a way to raise capital without diluting the current shareholders' equity. The RM450,000 of 8%, 5-year bonds were issued on 1 January 2019 and pay interest semi-annually on each 1 January and 1 July, which the payment is starting on July 2019. The market rate of bonds yield 6%. The financial year ends on 30 September. Wide Angle Bhd uses the effective interest method to amortize bond premium or discount.
REQUIRED: (Show your workings. Round your answer to the nearest RM)
(a) Prepare the journal entry to record the issuance of the bonds on 1 January 2019. (3 Marks)
(b) Prepare the journal entry to record the related transactions of bonds on 1 July 2019 and 30 September 2019. (4 Marks)
(c) Assume that Wide Angle Bhd was unable to sell the bonds dated 1 January 2019 until 1 March 2019, two months after they are dated. Explain the accounting treatment to record issuance of the bonds between interest date and interest expenses on 1 July 2019. (8 Marks)
Answer:
a)
| Date | Particulars | Debit $ | Credit $ |
| Cash | $ 516,244 | ||
| Bonds payable | $ 450,000 | ||
| Premium on issue of bonds | $ 66,244 |
b)
| Date | Particulars | Debit $ | Credit $ |
| 01-07-19 | Premium on issue of bonds | $ 5,025 | |
| Interest expense | $ 30,975 | ||
| Cash | $ 36,000 | ||
| 30-09-19 | Premium on issue of bonds | $ 5,327 | |
| Interest expense | $ 30,673 | ||
| Cash | $ 36,000 |
c)
| Date | Particulars | Debit $ | Credit $ |
| 01-03-19 | Cash | $ 521,407 | |
| Bonds payable | $ 450,000 | ||
| Premium on issue of bonds | $ 66,244 | ||
| Accrued interest | $ 5,163 |
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