Question

Please answer P12-2 question E,F,G,H.

P12-2 morgage? On January 1, 2004, Gerry Corporation issued $10,000,000 8% semia. The bonds were issued at face value. By December 31, 2006, the marke had fallen to $9,875,200. Interest payment dates are January I and lulu miannual coupon bond arket value of the bonds and July 1 of each year, ds to fall below the face Required: a. Prepare the entry to record the sale of the bonds on January 1, 2004 b. Prepare the entry made on the first coupon payment date of July 1, 2004 c. What will the book value of the bonds be on December 31, 2006? d. What factors would have caused the market value of the bonds to fall belo value? Explain. e. What accounting adjustment would Gerry be required to make on Decer 2006 f. Assume that Gerry retires the bonds on December 31, 2006, by buying the the open market. What journal entry would be made to retire the bonds? & Indicate the impact of the bond retirement on Gerry's net income and debe equity ratio. h. Explain why management may sometimes retire bonds when it is not in the best in terest of the company's stockholders. make on December 31, The balance sheet and income statement of Coca-Cola Company and Subsidiaries at De cember 31, 1999, are as follows: Coca-Cola Company and Subsidiaries Income Statement (in millions) For the Year Ended 12/31/99 $19,805 Net operating revenues Cost of goods sold 6,009 CARREG. A

Answer 1

Answer (E):

Accounting adjustments Gerry required to make on December 31, 2006 is as follows:

Gerry is required to recognize fair value loss of $ 124,800 ($ 10,000,000 - $ 9,875,200) in the books of accounts as on December 31, 2006 as required by U.S GAAP, ASC 820

Answer (F):

Journal entry to retire the bonds on December 31, 2006 is as follows:

Bonds Payable A/c                                Dr                     $ 10,000,000

          To Cash/Credit A/c                                                                     $ 9,875,200                

           To gain on retirement of bonds A/c                                       $ 124,800

(Being Bonds retired on December 31, 2006, by buying the bonds on the market price)

Answer (G):

Impact of the bond retirement on Gerry’s net income:

There will be a gain of $ 124,800 as a result of retirement of Bonds. Hence the net income will be increased by such amount.

Also Interest expense on Bonds of Rs $ 800,000 ($ 10,000,000 * 8%) will be saved every year from the financial year 2007 due to retirement of bonds. Hence the net income will be increase by $ 800,000.

Impact of Bonds retirement on Debt-equity Ratio:

Debt-equity ratio be be reduced.

Answer (H):

Sometimes management may retire bonds even though it is not in the best interest of the stockholders because there may be possibility of change in the interest rate, business conditions ,investment opportunities etc.