H&L PINES

It was spring 2011, and Patricia Knowles, sole shareholder of H&L Pines (H&L), a national supplier of evergreen trees to garden supply retailers, had decided to expand H&Ls product offering. She planned to carry more exotic trees and shrubs to keep up with the changing demands of retailers. The expansion would require an investment of $650,000 for the land, greenhouse constructions, inventory infusion and working capital requirements. Knowles wanted the new greenhouse to be operational by December 2012 to ensure that new plants would be ready for the spring planting season.

To help finance the expansion, H&L issue 20 years bonds with a coupon rate of 6.5% on May 15, 2011. Interest was to be paid semi-annually on November 15 and May 15. On the date of the issuance, the prevailing market interest rate was seven per cent.

On February 1, 2012, market interest rates dropped to 6%. Knowles thought it was an opportune time to recall a portion of the outstanding 9.5% bonds payable H&L had issued for its last expansion project (see Exhibit 1). The 9.5% bonds payable were purchased at 115 by H&L. On February 29, 2012, H&L decided to repurchase 45 per cent of the bonds payable. The 9.5% bonds paid interest semi-annually on June 1 and December 1. The market interest rate had been 8% when the bonds were issued. On the date of the purchase, the market interest rate remained at 6%.

REQUIRED

Post all opening balances and record all necessary transactions and adjusting entries dealing with the issuance of bonds and payments of interest for the period April 1, 2011, to May 31, 2012.

EXHIBIT 1: 9.5% BOND PAYABLE DETAILS

Issuance date: December 1, 2009

Maturity date: December 1, 2019 Face value (400 bonds): $400,000

Carrying value after December 1, 2010, interest payment date: $437,979

Carrying value at last fiscal year end (March 31, 2011): $436,991

Bond interest payable at last fiscal year end (March 31, 2011): $12,667