Expert Answers

1. Riley Co. has outstanding $5 million face amount of 12% bonds that were issued on January 1,1998 for $4,825,000. The 20 years bonds mature on December 31,2017 and are callable at 103(that is, they can be paid off at any time by paying the bondholders 103% of the face amount).

c. Assume that the bonds are called on December 31,2010. Record the journal entry to show the effect of the retirement of the bonds. ( Hint: Calculate the amount paid to bondholders; then determine how much of the bond discount would have been amortized prior to calling the bonds; and then calculate the gain or loss on retirement)

2. On January 1,2010, Drennen, Inc. issued $4.1 million face amount of 12- year, 14% stated rate bonds when market interest rates were 12%. The bonds pay semiannual interest each june 30 an December 31 and mature on December 31,2009.

c. Assume instead that the proceeds were $4,065,000. Record the journal entry to show the payment of semiannual interest and the related discount amortization on June 30, 2010, assuming that the discount of $35,000 is amortized on a straight- line basis.

3.  On January 1, 2010 Learned Inc., issued $11 million face amount of 20-years, 14% state rate bonds when market interested rates were 16%. The bonds pay interest semiannually each June 30 and December 31 and mature on December 31,2009.

c. Assume Instead that the proceeds were $11,460,000. record the journal entry to show the payment of semiannually interest the related premium amortized on June 30, 2010 assuming that the premium of $460,000 is amortized on a straight- line basis.

4. O’Kelley Co. has outstanding $3.5 million face amount of 9% bonds that were issued on January 1, 2002, for $3.5 million. The 20 years bonds were issued in $1,000 denominations and mature on December 31,2021. Each $1,000 bonds is convertible at the bondholder’s option into 10 shares of $11 par value common stock.

Requried:

a. under what circumstances would O’Kelley Co. bondholders consider converting the bonds?

Bondholders would e interested in converting the bonds to common stock if the market price per share of common stock was at least               % (or more) of the market price per bond.

b. Assume that the market price of O’Kelley Co.’s common stock is now $109 and that a bondholder elect to convert 437 $1,000 bonds. Record the journal entry to show the effect of the conversion on O’Keely Co.’s financial statement.