The difference between debt and equity in an entity’s 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 IASB’s thinking on the difference between financial instruments classified as equity and liability. a) Explain why it is important for entities to understand the impact of the classification of a financial instrument as debt or equity in the financial statements
The difference between debt and equity in an entity’s
position
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 IASB’s
thinking on the difference between financial instruments classified as equity and
liability.
a) Explain why it is important for entities to understand the impact of the classification
of a financial instrument as debt or equity in the financial statements
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%.
1) Calculate the proceeds from the sale of the bond & the discount or premium.
Give 2 reasons why you think it is discount/premium.
2) Prepare a bond amortization schedule for the life of the bond
3) Prepare the
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
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