A prospectus was issued by Birch Ltd on 1 November 2016, inviting applications f
ID: 2463244 • Letter: A
Question
A prospectus was issued by Birch Ltd on 1 November 2016, inviting applications for 5000 9% $200 debentures, payable $150 on application and $50 on allotment. The terms of the prospectus were such as to give the company the option to redeem the debentures at 1 month’s notice, providing a 12% premium was paid. If the company chose not to exercise this option for a period of 5 years, then the company could redeem them at nominal value. The market interest rate for debentures of similar risk was 9%.
Applications for 5300 debentures were received by 24 November. The debentures were allotted on 30 November, with excess application money being refunded to the unsuccessful applicants. All allotment money was received on 31 December. Interest was payable half-yearly on 30 June and 31 December.
On 1 November 2018, the company purchased 800 of the debentures on the open market for $180 each. Brokerage and stamp duty amounted to $210.
On 1 September 2019, the company gave notice to the holders of 3000 debentures of redemption on 31 October 2019. These were subsequently redeemed on 31 October, and appropriate interest was paid.
The balance of debentures was redeemed in due course on 30 November 2021.
Required
Provide general journal entries for the above transactions. Include entries for half-yearly interest payments. Assume the end of the reporting period is 30 June.
Explanation / Answer
BIRCH LTD
2016
to Nov 24 Cash Trust Dr 795 000
Application - Debentures Cr 795 000
(Cash received on 5 300 $200
debentures payable $150 on application)
Nov 30 Application - Debentures Dr 750 000
Debenture Holders Dr 250 000
Debentures Cr 1 000 000
(Allotment of debentures)
Nov 30 Application - Debentures Dr 45 000
Cash Trust Cr 45 000
(Refund to unsuccessful applicants)
Nov 30 Cash Dr 750 000
Cash Trust Cr 750 000
(Transfer from trust account)
Dec 31 Cash Dr 250 000
Debenture Holders Cr 250 000
(Cash received on allotment)
Dec 31 Interest Expense Dr 5 625
Cash Cr 5 625
(Interest paid on debentures:
$750 000 x 0.09 x 1/12)
2017
June 30 & Interest Expense Dr 45 000
Dec 31 Cash Cr 45 000
(Interest on $1 000 000 @ 9% for each ½ year)
2018
June 30 Interest Expense Dr 45 000
Cash Cr 45 000
(Interest on $1 000 000 @ 9% for ½ year)
Nov 1 Debentures Dr 160 000
Interest Expense Dr 4 800
Income on Redemption of Debs. Cr 20 800
Cash Cr 144 000
(Redemption of 800 debentures
on the open market for $180 each, and
interest expense for four months)
Nov 1 Brokerage and Stamp Duty Expense Dr 210
Cash Cr 210
(Brokerage and stamp duty on
open market redemption)
Dec 31 Interest Expense Dr 37 800
Cash Cr 37 800
(Interest on 4,200 debentures @ 9% for ½ year)
2019
June 30 Interest Expense Dr 37 800
Cash Cr 37 800
(Interest on 4,200 debentures @ 9% for ½ year)
Oct 31 Debentures Dr 600 000
Interest Expense Dr 18 000
Expense on Redemption of Debs. Dr 54 000
Debenture Holders Cr 672 000
(Redemption of 3 000 $200 debentures
for $224 each, and interest expense
for four months)
Oct 31 Debenture Holders Dr 672 000
Cash Cr 672 000
(Cash paid)
Dec 31 Interest Expense Dr 10 800
Cash Cr 10 800
(Interest on 1 200 $200 debentures
for six months at 9%)
2020
June 30 & Interest Expense Dr 10 800
Dec 31 Cash Cr 10 800
(Interest on 1 200 $200 debentures
for ½ year at 9%)
2021
June 30 Interest Expense Dr 10 800
Cash Cr 10 800
(Interest on 1 200 $200 debentures
for 2/1 year at 9%)
Nov 30 Debentures Dr 240 000
Interest Expense Dr 9 000
Debenture Holders Cr 249 000
(Redemption of 1 200 $200 debentures
at nominal value, and interest expense
for five months)
Nov 30 Debenture Holders Dr 249 000
Cash Cr 249 000
(Cash paid)
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