Spring Water Company Ltd. needed to raise $50 million of additional capital to finance the expansion of
Question:
Spring Water Company Ltd. needed to raise $50 million of additional capital to finance the expansion of its bottled water facility. After consulting an investment banker, it decided to issue bonds. The bonds had a face value of $50 million and an annual interest rate of 4.5%, paid semi-annually on June 30 and December 31, and will reach maturity on December 31, 2030. The bonds were issued at 96.1 on January 1, 2021, for $48,050,000, which represented a yield of 5%.
Required
a. Spring Water Company issued bonds with a face value of $50 million because it wanted to raise $50 million. However, it succeeded in raising only $48,050,000. Identify and explain two possible reasons why investors were not willing to pay $50 million for the bonds.
b. Show the journal entry to record the issuance of the bonds.
c. Show the journal entries to record the first two interest payments. Ignore year-end accruals of interest.
d. What amount will be reported on the statement of financial position at the end of the first year related to these bonds?
Face ValueFace value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...
Step by Step Answer:
a Investors were not willing to pay 50 million for the bonds for one of two reasons The risks associ...View the full answer
Understanding Financial Accounting
ISBN: 9781119406921
2nd Canadian Edition
Authors: Christopher D. Burnley
