Edgar Plc Issues £7 Million in 6-Year,10%,semi-Annual Coupon Debentures B)

question 1

Multiple Choice

Edgar Plc issues £7 million in 6-year,10%,semi-annual coupon debentures.The rate of return required by the market is 8% per annum.What is the journal entry to record the first payment of interest assuming using the effective-interest method to amortise any discount or premium (rounded to the nearest pound) ?

• A) \[\begin{array} { | l | l | r | r | }
• \hline \mathrm { Dr } & \text { Interest expense } & 287306 & \\
• \hline \mathrm { Dr } & \text { Debenture } & 62694 & \\
• \hline \mathrm { Cr } & \text { Cash } & & 350000 \\
• \hline
• \end{array}\]
• B) \[\begin{array} { | r | l | r | r | }
• \hline \mathrm { Dr } & \text { Interest expense } & 412694 & \\
• \hline \mathrm { Cr } & \text { Debenture } & & 62694 \\
• \hline \mathrm { Cr } & \text { Cash } & & 350000 \\
• \hline
• \end{array}\]
• C) \[\begin{array} { | r | l | r | r | }
• \hline \mathrm { Dr } & \text { Interest expense } & 350000 & \\
• \hline \mathrm { Cr } & \text { Debenture } & & 43722 \\
• \hline \mathrm { Cr } & \text { Cash } & & 306278 \\
• \hline
• \end{array}\]
• D) \[\begin{array} { | l | l | r | r | }
• \hline \mathrm { Dr } & \text { Interest expense } & 306278 & \\
• \hline \mathrm { Dr } & \text { Debenture } & 43722 & \\
• \hline \mathrm { Cr } & \text { Cash } & & 350000 \\
• \hline
• \end{array}\]

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Definitions:

Asset Cost

The total amount invested to acquire, produce, or improve a tangible or intangible asset, utilized for accounting and tax purposes.

Lease-Purchase Analysis

A financial evaluation technique used to determine the most cost-effective option between leasing an asset and purchasing it outright.

Sale and Leaseback

A financial transaction where one sells an asset and leases it back for the long-term; thus, one continues to be able to use the asset but does not own it.

Balance Sheet

A financial statement that provides a snapshot of a company's financial condition at a specific point in time, detailing assets, liabilities, and equity.