Instructions:

a) Assume the annual accounting period ends on December 31 instead.

- Prepare the journal entry to record the payment of interest on July 1, 2017.

- Prepare the AJE required on December 31, 2017

- Prepare the journal entry to record the payment of interest on January 1, 2018.

- What is the carrying value of the bonds on January 1, 2018? Show your calculations or marks will be lost.

b) Assume that after interest is paid on January 1, 2018, the company buys back the bonds. On that date, the market interest rate was 12%.

- Calculate what the company must pay to redeem the bonds. (Hint: This requires time value of money calculations.)

- Prepare the journal entry to record the redemption.

- Using a residual analysis, explain why a gain/loss must be recognized; also explain where on the SOCI the gain/loss would appear.

- Assume a gain was realised. Assess the immediate impact on the debt/asset ratio. What will be the impact on the interest cover ratio for the financial year ending December 31, 2018 (compared with the previous financial year)?

* P10-6B On January 1, 2017, Ashlock Chemical AG issued 4,000,000, 10%, 10-year bonds at 4,543,627. This price resulted in an 8% effective-interest rate on the bonds. Ashlock uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest on each January 1