On January 1, 1999, 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, 2001, 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, 2001—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?”

Instructions With the class divided into groups, answer the following:

(a) What is the carrying value of the outstanding Jerry Mall Corporation 5-year bonds on January 1, 2001? (Assume straight-line amortization.)

(b) Prepare the journal entry to retire the 5-year bonds on January 1, 2001. 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.

COMMUNICATION ACTIVITY