On July 1, 2015, ABC Co. issued 10-year, $4,574 million maturity value, 3% coupon bonds when the market rate was 2% for a cash price of $4,994 million. Interest was payable semi-annually on Dec. 31 and June 30. ABC also issued $3,527 million face value, 20-year, zero coupon bonds on July 1, 2017, that matured on June 30, 2037, for a cash price of $2,619million. The effective market interest rate at issuance was 1.5%. ABC repurchased $1,143 million face value coupon bonds on June 30, 2020 for $1,220 million cash (after interest was paid) and $582 million in face value of the zero-coupon bonds on June 30, 2021 for a purchase price of $432 million cash. Round to nearest million with no decimals. This includes all interim number calculations like cash interest. Example: 4168 M x .1968 = 820.26 = 820 M. Do not include .26 or add zeroes. Round percentages in Question 6 to two decimal places and dollar amounts should be in millions with no decimals. Rounding a percentage to two decimals example: 422/1368 = .30847 = 30.85%. For present values, we recommend using the round function for when using excel. If not using excel to calculate present values, then show all your work, including any PV factors with five decimal places.

1. Show the calculations for how the cash prices were determined for both bond issuances and make the journal entries for each at issuance using discount or premium accounts if applicable. (Do not net the discount/premium in the Bond Payable account). Round to nearest million with no decimals.

2. Prepare amortization schedules for both bond issuances beginning with the issuance date. Note interest is semi- annual for the coupon bonds and you may assume annual for the zero- coupon bonds. Be sure to include a column for the balance remaining in the bond discount or premium account as well as the book value. Use the effective interest method

3. What amount of interest expense for the bonds did ABC report on its calendar year income statement in 2019 for each bond separately and in total (be careful as both bonds were issued in the middle of the year)?

4. Interest expense is deductible on the corporate tax return. Assuming a corporate tax rate of 19% in 2019, how much did ABC save in taxes by deducting the interest expense? What was the after-tax interest cost in 2019?

5. At the end of June 30, 2020, what was the book value of the coupon bonds before the repurchase transaction? At the end of June 30, 2021, what was the book value of the zero-coupon bond before the repurchase transaction? Name the two accounts and their respective balances from the Balance Sheet that combine to determine the book value for each bond. Reference your entry in question 1 and your amortization tables for the unamortized premium/discount at these specific dates.

6. Prepare the journal entries to record the repurchase of some of the debt in 2020 and 2021. You must determine the percentage of the face value repurchased by dividing the repurchased amount by the original maturity value of the bonds. Please express that % with two decimal places. [Repurchasing some of the bonds before the maturity date is called early extinguishment of the debt. The company makes a payment to the bondholders, who relinquish the bonds and their right to collect the face value at maturity, and the debt is removed from the books. To record the early extinguishment, the company makes a journal entry to remove the appropriate bond payable and discount/premium accounts, decrease cash by the amount paid to the bondholders, and record any gain or loss as the difference between the book value and cash received. Look at your answer to #5 and note that a portion of each account related to this debt must be removed from the books. [The journal entry is analogous to the entry you would use to remove a long-term asset, along with its accumulated depreciation, from the books when it is sold.]

7. Explain why company managers might choose to issue zero-coupon bonds instead of interest-bearing bonds or coupon bonds instead of zero- coupon bonds? Give pros and cons of each. Be sure to consider the situation from the bond issuers viewpoint and not the bondholder. 8. Explain why the bond issuer might decide to repurchase some of the bonds before the maturity date? Be sure to state whether management may choose to repurchase when the interest rate is increasing and decreasing (both) and explain why. There are reasons for each scenario.