PART 1: SlamDunk, Inc. sells $300,000 of 10% bonds on February 1, 2003. The bond

Question

PART 1:

SlamDunk, Inc. sells $300,000 of 10% bonds on February 1, 2003. The bonds pay interest on August 1 and February 1. The due date of the bonds is August 1, 2006. The bonds yield 12%. The company has a year end of December 31. Show the journal entries required on the following dates:

a. February 1, 2003

b. August 1, 2003

c. December 31, 2003

d. February 1, 2004

e. Now, assume that on May 1, 2004, the company reacquires half the bonds ($150,000 face)

for $154,000 including accrued interest. Assume that after the February 1 entry there is a remaining discount of $12,636. Prepare the journal entries required upon reacquisition.

PART 2:

On December 1, 2003, SlamDunk Inc. placed coupons in the local newspaper for $5 off a $50 purchase. The coupons have an expiration date of March 31, 2004. The number of coupons circulated was 1,500,000 and SlamDunk Inc. anticipates that 5% of these coupons will eventually be redeemed. During December, 2003, 45,000 coupons were actually redeemed. During January – March, 2004, 50,000 additional coupons were redeemed. These were the only coupons issued during 2003 or 2004.

a. How much expense would be recognized by SlamDunk Inc. for the coupons for the year ended December 31, 2003?

b. What amount would be shown as a liability related to the coupons on the balance sheet as of December 31, 2003? If none, explain why.

c. How much expense would be recognized by SlamDunk Inc. for the coupons for the quarter ended March 31, 2004?

Explanation / Answer

Part- 1

Answer (a)

On Feb, 1 2003

First of calculate Present value of Bonds

Journal Entry

Answer (b)

On Aug, 1 2003

Journal Entry

Answer: (c ) On Dec 31,2003

We shall book Accrued Interest and and amortize Bond Discount for 5 months Aug 1, 2003 to Feb 1, 2004

Journal Entry

Answer (d)

On Feb 1, 2004

Journal Entry

Answer (e)

Face Value 300000 Coupon Rate: (10%/2) 5% Annual Interest 15000 Number of half year periods: (Feb 1, 2003 to Aug 1, 2006) 7 YTM: (12%/2) 6% Bond Price B0= (Annual Interest*(PVIFA Required return,n))+(Maturity Value*(PVIF Required return,n)) Bond Price B0= (15000*(PVIFA 6%,7))+(300000*(PVIF 6%,7)) Bond Price B0=(15000*5.58239 )+(300000*0.66506) Bond Price B0= 283253.85

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