The difference between debt and equity in an entitys statement of financial position is not easily distinguishable for preparers of financial statements. Some financial instruments may have both features, which can lead to inconsistency of reporting. The international Accounting Standards Board has agreed that greater clarity may be required in its definitions of assets and liabilities for debt instruments. It is thought that defining the nature of liabilities would help the IASBs thinking on the difference between financial instruments classified as equity and liability.

b) Witco Limited patented and successfully tested a new e-cigarette. To expand its ability to produce and market this new product, Witco needs to raise $400,000. On January 1 2010, Witco issued a 12% $400,000, 5 year bond. The bond pays interest semi-annually on June 30 and December 31. The bonds effective interest rate is 10%.

iii. Prepare the journal entries to record the following: a) The issuance of the bond on Jan 1 2010 b) The first interest payment c) The retirement of the bond at a $400,000 call price on January 1 2013