Forums Homework Help How much cash will have to be paid to retire the bonds?

Tagged:

Viewing 1 post (of 1 total)
• Author
Posts
• #8370

Bassi Corporation has \$ 8,000,000 of 9.5 percent, 25-year bonds dated May 1, 20×6, with interest payable on April 30 and October 31. The companyÃ¢â‚¬â„¢s fiscal year ends on December 31, and it uses the straight-line method to amortize bond premiums or discounts. The bonds are callable after ten years at 103 or convertible into 40 shares of \$ 10 par value common stock.

bonds are convertible into 40 shares of \$10 par value common stock for each \$1,000 bond. So, \$8,000,000 divided by \$1,000 = 8,000 x 40 shares = 320,000 shares of \$10 par value common stock. When recording issuance of or conversion into common stock, Common Stock is credited for the par value only (320,000 x \$10 = \$3,200,000) and any additional is credited to Additional Paid In Capital. (We’ll learn this in the next two chapters!)

There is no gain or loss on a conversion. But you must close (debit) the Bonds Payable account for \$8,000,000 and close (credit) the Unamortized Bond Discount account for the balance after 10 years of straight-line amortization. Whatever the carrying value is must then be allocated to Common Stock (\$3,200,000) and Additional Paid In Capital

1. Assume the bonds are issued at 103.5 on May 1, 20×6.

a. How much cash is received?

b. How much is Bonds Payable?

c. What is the difference between a and b called and how much is it?

d. With regard to the bond interest payment on October 31, 20×6:

(1) How much cash is paid in interest?

(2) How much is the amortization?

(3) How much is interest expense?

2. Assume the bonds are issued at 96.5 on May 1, 20×6.

a. How much cash is received?

b. How much is Bonds Payable?

c. What is the difference between a and b called and how much is it?

d. With regard to the bond interest payment on October 31, 20×6:

(1) How much cash is paid in interest?

(2) How much is the amortization?

(3) How much is interest expense?

3. Assume the issue price in requirement 1 and that the bonds are called and retired ten years later.

a. How much cash will have to be paid to retire the bonds?

b. Is there a gain or loss on the retirement, and if so, how much is it?

4. Assume the issue price in requirement 2 and that the bonds are converted to common stock ten years later.

a. Is there a gain or loss on the conversion, and if so, how much is it?

b. How many shares of common stock are issued in exchange for the bonds?

c. In dollar amounts, how does this transaction affect the total liabilities and the total stockholdersÃ¢â‚¬â„¢ equity of the company? In your answer, show the effects on four accounts.

5. Assume that after ten years market interest rates have dropped significantly and that the price on the companyÃ¢â‚¬â„¢s common stock has risen significantly. Also assume that management wants to improve its credit rating by reducing its debt to equity ratio and that it needs what cash it currently has for expansion. Would management prefer the approach and result in requirement 3 or 4? What would be a disadvantage of the approach you chose?

1. Bonds issued at 103.5 on May 1, 20×6

b. Amount of Bonds Payable: \$ 8000000

c. The difference of between a and b is the bond

d. (1) Cash paid in interest:

(2) Amortization:

(3) Interest expense: \$ 374400

2. Bonds issued at 96.5 on May 1, 20×6

b. Amount of Bonds Payable:

c. The difference of between a and b is the bond

d. (1) Cash paid in interest:

(2) Amortization:

(3) Interest expense: \$ 385600

3. Bonds called and retired ten years later

a. Cash to retire bonds:

b.

4. Bonds converted to common stock ten years later

a.

b. Numbers of shares of common stock issued in exchange for bonds:

c. Bonds payable and its accompanying unamortized discount will be

Common stock and additional paid-in capital will be

Change in liabilities

Bonds payable

Unamortized bond discount

Bond carrying value

Amount of discount that remains to be amortized:

Change in stockholdersÃ¢â‚¬â„¢ equity

Common stock