PART B: Financial Liabilities

Historically, SP applies for bank loans to finance its projects. In 2016, Mr. Kiran, a finance officer, made a suggestion to the top management about issuing bonds as another way of financing a new proposed construction project in Cyberjaya. Mr. Kiran also explains the advantages of issuing bonds in relative to bank loans. The idea has received good responses from the management team. The team allows bonds issuance starting 2017.

On 1 January 2017, SP issued bonds with a face value of RM3,000,000 and a maturity date of 31 December 2026. The bonds have a stated interest rate of 10% and estimated yield rate of 12%. Interest on the bond is payable on January 1 and July 1. The bond was sold to Bonda Berhad.

SP starts its construction project in Cyberjaya at the beginning of year 2017. The project is the first project that has been financed via the bond. Mr. Kiran uses effective-interest method to amortize any premium or discount related to the bonds issued by SP.

The company made a forecast that the interest rate will fall during the next few years and is planning to retire this bond. The bonds are callable at 92 on 2 July 2018.

CASE INSTRUCTIONS:

(8)Prepare the journal entries to record the bond issuance. (Show calculation).

(9)Prepare the adjusting entries as of 31 December 2017. (Show calculation).

(10)Briefly explain the accounting treatment for the retirement of the bonds.