Question

QUESTION 3 (21 marks) Goofie, Inc. experienced the following transactions in 2018: a. Sold bond of $200,000 in 10-year, 10% bonds payable at 98 for $196,000 on July 1. Interest is payable semiannually on January I and July 1. b. Issued 15,000 shares of $20 ordinary shares with par-value of S1 for cash on August 3. Purchased 900 ordinary shares as treasury shares paying $18 per share on September 20. d. Sold 500 shares of the treasury shares for $24 on November 30. e. Declared and paid $14,000 dividend to ordinary shareholders on December 31. Required: Please answer the following questions. 1 Please record transactions a-e in the journal. The company records treasury shares with cost method. (13 marks) ii. How much was the interest expense recognized in 2018 for the bond? Please show your calculations. (3 marks) iii. How much is the carrying value (book value) of the bond at the end of 2018? Please show your calculations. (1 mark) iv. As an existing ordinary shareholder of the company, do you prefer to raise new funds through the issuance of additional ordinary shares or through the issuance of bond? Why? (3 marks) In which section(s) of the statement of cash flows can we find cash flow information related to transactions a~e? (1 mark) 01/L

Answer 1

i.

Transaction	Date	Account Titles and Explanation	Debit	Credit
a.	July 1, 2018	Cash	196000
		Discount on bonds payable	4000
		Bonds payable		200000
		(To record issuance of bonds)
b.	August 3, 2018	Cash (15000 x $20)	300000
		Common stock (15000 x $1)		15000
		Paid-in capital in excess of par value		285000
		(To record issuance of common stock)
c.	September 20, 2018	Treasury stock (900 x $18)	16200
		Cash		16200
		(To record purchase of treasury stock)
d.	November 30, 2018	Cash (500 x $24)	12000
		Treasury stock (900 x $18)		9000
		Paid-in capital from treasury stock		3000
		(To record sale of treasury stock)
e.	December 31, 2018	Dividends	14000
		Cash		14000
		(To record dividends declared and paid)

ii. Interest expense recognized in 2018 for the bond = Interest paid + Amortization of bond discount = ($200000 x 10% x 6/12) + ($4000 x 6/120) = $10000 + $200 = $10200

Note: The discount on bonds payable has been amortized using the straight-line method.

iii. Carrying value (book value) of the bond at the end of 2018 = $196000 + $200 = $196200

iv. As an existing ordinary shareholder of the company, the issuance of bonds is preferred over the issuance of additional ordinary shares.

The issuance of additional ordinary shares would result in a dilution in the ownership of the company for the existing ordinary shareholders and hence is not preferred.