Decision-Making Across the Organization On January 1, 2015, Glover Corporation i

Question

Decision-Making Across the Organization On January 1, 2015, Glover Corporation issued $2,400,000 of 5-year, 8% bonds at 95, The bonds pay interest annually on January 1. By January 1,2017, the market rate of interest for bonds of risk similar to those of Glover Corporation had risen. As a result, the market value of these bonds was $2,000,000 on January 1, 2017-below their carrying value. Joanna Glover, president of the company, suggests repurchasing all of these bonds in the open market at the $2,000,000 price. To do so, the company will have to issue $2,000,000 (face value) of new 10-year, 1 190 bonds at par. The president asks you, as controller, "What is the feasibility of my proposed repurchase plan?" Instructions With the class divided into groups, answer the following. What is the carrying value of the outstanding Glover Corporation 5-year bonds on January 1,2017? (Assume straight-line amortization.) Prepare the journal entry to redeem the 5-year bonds on January 1, 2017. Prepare the journal entry to issue the new 10-year bonds. Prepare a short memo to the president in response to her request for advice. List the economic factors that you believe should be considered for her repurchase proposal.

Explanation / Answer

A) Carrying value of bond = Face value - unamortized discount

Face value of bond = 2400000 $ ( 24000 bonds)

Total discount on bond = 24000 * (100-95) = 120000$

Amlortization Per Year = 120000/5 = 24000$

After 2 years, Unamortized portion on 1 jan 2017 = 24000*3 = 72000$ ( remaining life)

hence carrying value = 2400000 - 72000 = 2328000$

B) Journal Entry

8% Bonds payable a/c Dr

To Discount on bond payable

To cash a/c

To profit on redemption a/c

2400000

72000

2000000

328000

Cash a/c Dr.

To 11% Bonds payable a/c

2000000

2000000

C) To know the feasibility, we have to compare Different factor.

?

According to present situation there will be a profit of 328000 in books as shown in journal entry.hence repurchase plan will be viable.however factors shown above should also be considered while considering the proposal.

Date Particulars Debit Credit 1-jan-2017

8% Bonds payable a/c Dr

To Discount on bond payable

To cash a/c

To profit on redemption a/c

2400000

72000

2000000

328000

1-jan-2017

Cash a/c Dr.

To 11% Bonds payable a/c

2000000

2000000

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