(Learning Objectives 2, 5: Refi nancing old bonds payable with new bonds) Great Brands completed one of the most famous debt refi nancings in history. A debt refi nancing occurs when a company issues new bonds payable to retire old bonds. The company debits the old bonds payable and credits the new bonds payable.

Great Brands had $140 million of 5.75% bonds payable outstanding, with 21 years to maturity. Great retired these old bonds by issuing $77 million of new 11% bonds payable to the holders of the old bonds and paying the bondholders $8 million in cash. Great issued both groups of bonds at face value. At the time of the debt refi nancing, Great Brands had total assets of $497 million and total liabilities of $357 million. Net income for the most recent year was

$6.2 million on sales of $1 billion.

❙ Requirements 1. Journalize the debt refi nancing transaction.

2. Compute annual interest expense for both the old and the new bond issues.

3. Why did Great Brands refi nance the old bonds 5.75% payable with the new 11% bonds?

Consider interest expense, net income, and the debt ratio.