Bonds: terminology and basic accounting On 1 January x3, Ajax Steel Company issues, at a price of 101, A150 million of 6% bonds due 31 December x7. Interest is payable annually. Ajax Steel values the bonds in the balance sheet at amortised cost and uses the straight-line method to amortise any initial discount or premium. The company’s financial year ends on 31 December.

Required

(a) What is: (i) the term of the bonds?

(ii) the coupon rate?

(iii) the amount Ajax Steel must pay bondholders when the bonds mature?

(b) Show the effect on Ajax Steel’s accounts of:

(i) the issuance of the bonds (ignore issuance costs);

(ii) the recognition of interest expense in x3 and the payment of interest on 31 December x3.

Use journal entries or the balance sheet equation.

(c) When Ajax Steel issued the 6% bonds, was the market interest rate on debt of similar risk and maturity higher or lower than the coupon rate on Ajax’s bonds? Explain.

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