On January 1, 1996, Jerry Mall Corporation issued ($ 1,200,000) of 5 -year, (8 %) bonds at
Question:
On January 1, 1996, Jerry Mall Corporation issued \(\$ 1,200,000\) of 5 -year, \(8 \%\) bonds at 97; the bonds pay interest semiannually on July 1 and January 1. By January 1, 1998, the market rate of interest for bonds of risk similar to those of Jerry Mall Corporation had risen. As a result the market value of these bonds was \(\$ 1,000,000\) on January 1, 1998-below their carrying value. Jerry Mall, president of the company, suggests repurchasing all of these bonds in the open market at the \(\$ 1,000,000\) price. But to do so the company will have to issue \(\$ 1,000,000\) (face value) of new 10 -year, \(12 \%\) bonds at par The president asks you as controller, "What is the feasibility of my proposed repurchase plan?"
\section*{Instructions}
(a) What is the carrying value of the outstanding Jerry Mall Corporation 5 -year bonds on January 1, 1998 (assume straight-line amortization)?
(b) Prepare the journal entry to retire the 5-year bonds on January 1, 1998. Prepare the journal entry to issue the new 10 -year bonds.
(c) Prepare a short memo to the president in response to his request for advice. List the economic factors that you believe should be considered for his repurchase proposal.
Step by Step Answer:
Financial Accounting Tools For Business Decision Making
ISBN: 9780471169192
1st Edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso