This preview shows page 1. Sign up to view the full content.
Unformatted text preview: Appendix A)
Total present value (i.e., proceeds)
351.42 Cash (+A)
Discount on Bonds Payable (–L) 4,648.58
Bonds Payable (+L) 5,000.00
Issued bonds. P11–11 Continued
b. Interest Expense (E, –SE) Payable (+L) 325.40a
Discount on Bonds
300.00c Incurred and paid interest.
a $325.40 = Book Value Effective Rate per Period = $4,648.58 7%
b $25.40 = Interest Expense – Interest Payment.
c $300.00 = Face Value Stated Rate per Period = $5,000 6% c. As of June 30, 2014, the bonds have a remaining life of five sixmonth periods until they mature.
Option 1: Repurchase the bonds through the bond market.
Present value (i = 5%, n = 5)
PV of face value
($5,000 .7835 from Table
3,917.50 4 in Appendix A)
PV of interest payments
in Appendix A)
Total present value (i.e., repurchase price) ($300 4.3295 from Table 5
5,216.35 Option 2: Repurchase the bonds using the call provision.
Repurchase Price = Face Value 103.5%
= $5,000 103.5%
= $5,175.00 In this case, Ficus Tree Farm would have to use less cash to redeem the bonds using the call provision
than to repurchase them through the bond market. Consequently, the company should use the call
provision to redeem the bonds.
d. Assume that a company wishes to redeem all outstanding bonds prior to maturity. It is unlikely that it
could accomplish this goal by repurchasing the bonds through the bond market. Some bondholders would
simply be unwilling to sell the bonds. It is costly for bondholders to sell their bonds and reinvest. They
incur transaction costs (i.e., brokerage fees, etc.) when selling investments. It is also timeconsuming (for
example, the opportunity cost of researching new investment opportunities). Bondholders would also
consider the tax implications of selling their bonds. If the bondholder would have to recognize any gains on
the sale of the bond, these gains would be considered taxable income. To avoid these taxes, the
bondholder may prefer to simply hold the bond. By exercising a call provision,...
View Full Document
This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.
- Fall '08