Question

The founder of Frenza asks us to assist her in accounting and analysis of the corporation’s bonds, which have an annual contract rate of 8%. She wants to know the business and accounting implications of further debt issuances as she looks for ways to finance the growth of Frenza. The following Tableau Dashboard is provided to help us address her questions and provide recommendations for her business decisions.

Frenza Bond Amortization (Carrying Value (Green)) (Unamortized Discount (red))

Frenza: January 1, Year 1 Carrying Value:$88,000 (green)

$100,000- $80,000 $60,000 $40,000 $20,000 $0 January 1, Year June 30, Year 1 December 31, June 30, Year 2 December 31, June 30, Year 3 December 31, Year 1 Year 3 Year 2

Frenza: June 30, Year 1 Carrying Value: $90,000 (green)

Frenza: December 31, Year 1 Carrying Value: $92,000 (green)

Frenza: June 30, Year 2 Carrying Value: $94,000 (green)

Frenza: December 31, Year 2 Carrying Value: $96,000 (green)

Frenza: June 30, Year 3 Carrying Value: $98,000 (green)

Frenza: December 31, Year 3 Carrying Value: $100,000 (green)

Frenza: January 1, Year 1 Unamortized Discount: $12,000 (red)

Frenza: June 30, Year 1 Unamortized Discount: $10,000 (red)

Frenza: December 31, Year 1 Unamortized: $8,000 (red)

Frenza: June 30, Year 2 Unamortized Discount: $6,000 (red)

Frenza: December 31, Year 2 Unamortized Discount: $4,000 (red)

Frenza: June 30, Year 3 Carrying: $98,000 (red)

Rest of the part of the both Graph

Frenza Cash: $55,000 (green)

Frenza Inventory: $30,000 (yellow)

Lika Cash: $32,000 (green)

Lika Inventory: $42,000 (yellow)

Nelo Cash: $18,000 (green)

Nelo Inventory; $7,000 (yellow)

Frenza Market Rate for Bonds: 9%

Lika Market Rate for Bonds: 7%

Nelo Market Rate for Bonds: 4%

1(a). Prepare journal entries to record the issuance of Frenza bonds on January 1, Year 1.
1(b). Prepare journal entries to record the first and second interest payments on June 30, Year 1, and December 31, Year 1.
1(c). Prepare journal entries to record the maturity of the bonds on December 31, Year 3.
2. Frenza needs to raise money to purchase new equipment. The founder is concerned about losing ownership control of her company. Which of the following ways to raise money would we recommend?
3. Frenza needs to raise money to purchase more inventory. The founder is concerned about the company’s ability to make required cash payments when cash flows are low. Which of the following ways to raise money would we recommend?

Options for General Journal

• Accounts payable
• Accounts receivable
• Accumulated depreciation
• Bond interest expense
• Bond interest payable
• Bonds payable
• Cash
• Common stock
• Contributed capital in excess of par value
• Depreciation expense
• Discount on bonds payable
• Gain on retirement of bonds payable
• Interest payable
• Lease liability
• Leased asset
• Loss on retirement of bonds payable
• Premium on bonds payable
• Rental expense

2) Record the semiannual interest payment and amortization on December 31, Year 1.

Options for General Journal

• Accounts payable
• Accounts receivable
• Accumulated depreciation
• Bond interest expense
• Bond interest payable
• Bonds payable
• Cash
• Common stock
• Contributed capital in excess of par value
• Depreciation expense
• Discount on bonds payable
• Gain on retirement of bonds payable
• Interest payable
• Lease liability
• Leased asset
• Loss on retirement of bonds payable
• Premium on bonds payable
• Rental expense

Options for General Journal

• Accounts payable
• Accounts receivable
• Accumulated depreciation
• Bond interest expense
• Bond interest payable
• Bonds payable
• Cash
• Common stock
• Contributed capital in excess of par value
• Depreciation expense
• Discount on bonds payable
• Gain on retirement of bonds payable
• Interest payable
• Lease liability
• Leased asset
• Loss on retirement of bonds payable
• Premium on bonds payable
• Rental expense

Answer 1

1) When bonds are issued at a value less their face value, they are considered to be issued at discount. Bonds' carrying value at the issuance will be amount collected from issuing such bonds at discount Carrying value will start increasing when the firm records interest expense semiannually at the time of making semiannual coupon payments. Discount amortized will be equal to carrying value of bonds at the issuance date and carrying value of the bonds at the interest payment date. At the maturity, as all discount on bonds payable would have been amortized, bonds' carrying value will be equal to their face value. Therefore, journal entry at maturity will involve only a debit to bonds payable and a credit to cash for amount equals to face value of the bonds issued. Credit Entry # 1A) [Carrying valueo on Jan. 1, Year-1] ($100000 - $88000] [Face value] $100,000 1B-1) $2,000 $4,000 [Bal. figure --> $4000 + $ 2000 = $6000] (Difference between $88,000 & $90,000] ($100000 x 8% / 2] Date General Journal Debit Jan. 1, Cash $88,000 Year-1 Discount on Bonds Payable $12,000 Bonds Payable (To record bonds issued at discount) Jun. 30, Interest Expense $6,000 Year-1 Discount on Bonds Payable Cash (To record first semiannual coupon payment) Dec. 31, Interest Expense $6,000 Year-1 Discount on Bonds Payable Cash (To record second semiannual coupon payment) Dec. 31, Bonds Payable $100,000 Year-3 Cash (To record bonds matured and paid-off) 1B-2) $2,000 $4,000 [Bal. figure --> $4000 + $2000 = $6000] (Difference between $90,000 & $92,000] ($100000 x 8% / 2] 10) $100,000 [Face value of the bonds payable] (Interest expense related entry would have been recorded already before recording this)

2) When firm worries about losing ownership control while raising required capital, the best option available is to go for raising funds through debts instead of issuing any common or preferred stocks. If firm holds any treasury stock and if it tries to raise fund by selling such treasury stocks also, it will increase number of shares outstanding which in turn will make the ownership to lose. Therefore, following ways would be recommended to raise fund for purchasing new equipment not to lose ownership control: --> Issue bonds --> Issue a note to a bank 3) When firm worries about default risk associated with payment of periodic interest and repayment of borrowed fund at maturity, the best option availabel to the firm is raise funds through equity issues such as common stock or preferred stock or reissue of treasury stock. So, following ways would be recommended to raise fund for purchasing new equipment not to worry about default risks: --> Issue common stock --> Issue preferred stock