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Chapter 12: Q10SE_1 (page 657)

Retiring bonds payable before maturity

On January 1, 2018, Powell Company issued $350,000 of 10%, five-year bonds

payable

at 102. Powell Company has extra cash and wishes to retire the bonds payable

on

January 1, 2019, immediately after making the second semiannual interest

payment. To

retire the bonds, Powell Company pays the market price of 98.

Requirements

1. What is Powell Company’s carrying amount of the bonds payable on the

retirement

date?

2. How much cash must Powell Company pay to retire the bonds payable?

3. Compute Powell Company’s gain or loss on the retirement of the bonds

payable.

Short Answer

Expert verified

Answer:

The carrying amount of the bonds on retirement is $348,600.

Step by step solution

01

Definition of bond maturity

The due date of the bonds is known as the maturity of the bonds.

02

Calculation of the bond amortization

Premium on bonds = $7,000

Amortizationofbonds=AmountofpremiumNumberofperiods=$7,00010=$700

Hence the semi-annual amortization of the bods is $700.

Annual bond amortization is $1,400

03

calculation of the carrying amount

Carrying amount of the bonds
Face Value of Bonds
$350,000

Add: The first-year bond amortization
($1,400)

Carrying amount on the retirement of bonds

$348,600

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Most popular questions from this chapter

Determining bond prices and interest expense

Jones Company is planning to issue $490,000 of 9%, five-year bonds payable to

borrow for a major expansion. The owner, Shane Jones, asks your advice on some

related matters.

Requirements

1. Answer the following questions:

a. At what type of bond price Jones Company will have total interest expense

equal to the cash interest payments?

b. Under which type of bond price will Jones Company’s total interest expense be

greater than the cash interest payments?

c. If the market interest rate is 12%, what type of bond price can Jones Company

expect for the bonds?

2. Compute the price of the bonds if the bonds are issued at 89.

3. How much will Jones Company pay in interest each year? How much will Jones

Company’s interest expense be for the first year?

Computing the debt to equity ratio

Ludwig Corporation has the following data as of December 31, 2018:

Total Current Liabilities \( 36,210 Total Stockholders’ Equity \) ?

Total Current Assets 58,200 Other Assets 36,800

Long-term Liabilities 139,630 Property, Plant, and Equipment, Net 206,440

Compute the debt to equity ratio at December 31, 2018.

The following questions are not related.

Requirements

1. Duncan Brooks needs to borrow \(500,000 to open new stores. Brooks can borrow \)500,000 by issuing 5%, 10-year bonds at 96. How much will Brooks actually receive in cash under this arrangement? How much must Brooks pay back at maturity? How will Brooks account for the difference between the cash received on the issue date and the amount paid back?

2. Brooks prefers to borrow for longer periods when interest rates are low and for shorter periods when interest rates are high. Why is this a good business strategy?

Bond prices depend on the market rate of interest, stated rate of interest,and time.

Requirements

1. Compute the price of the following 8% bonds of Country Telecom.

a. \(100,000 issued at 75.25

b. \)100,000 issued at 103.50

c. \(100,000 issued at 94.50

d. \)100,000 issued at 103.25

2. Which bond will Country Telecom have to pay the most to retire at maturity?

Explain your answer.

Payne Corporation has the folowing accounts as of December 31, 2018:

Total Assets $60,000

Total Liabilities 20,000

Total Equity 40,000

Compute the debt to equity ratio at December 31,2018.
See all solutions

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