Murcia Corporation has $4,000,000 if 8 percent, 25-year bonds dated May1, 2011, with interest payable on April

Question:

Murcia Corporation has $4,000,000 if 8 percent, 25-year bonds dated May1, 2011, with interest payable on April 30 and October 31. The company’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 10 years at 103 or convertible into 40 shares of $10 par value common stock.

Required

1. Assume the bonds are issued at 103.5 on May 1, 2011.

(a) How much cash is received?

(b) How much is Bonds payables?

(d) With regard to the bond interest payment on October 31, 2011:

(i) How much cash is paid in interest?

(ii) How much is the amortization?

(iii) How much is interest expense?

2. Assume the bonds are issued at 93.5 on May 1, 2011.

(a) How much cash is received?

(b) How much is Bonds payables?

(d) With regard to the bond interest payment on October 31, 2011:

(i) How much cash is paid in interest?

(ii) How much is the amortization?

(iii) How much is interest expense?

3. Assume the issue price in requirement 1 and that the bonds are called and retired 10 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 10 years later.

(a) Is there a gain or loss on 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 stockholders’ equity of the company? In your answer, show the effects on four accounts.

5. Assume that after 10 years market interest rates have dropped significantly and that the price of the company’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? Explain your answer. What would be a disadvantage of the approach you chose?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...