Question

P12-5 a,b,c,d

What is the economic value of the bonds on December 31,2001? CHAPTER 12 LONG-TERM LIABILITIES g. What should the liability value and the economic value of the bonds be on January 1, 2011, the maturity date of the bonds? Explain. 213 oh. Prepare the entry to record the retirement of the bonds on January 1,2011. P12-5 Refer to P12-4. Assume that on June 30, 2009, market interest rates soared to 12%. Required: COVLE Compute the economic value of the bonds on June 30, 2009. а. Comment on any accounting adjustments required by O'Brien Corporation because of the change in market interest rates. b. What entry would be made by O'Brien if it retired the bonds on June 30, 2009, by purchasing the bonds in the open market? C. d. Explain why the action taken in part (c) may not be in the best interests of O'Brien's stockholders. The following is the discount amortization schedule for a $1,000 face, 6% semiannual coupon bond, issued when the market interest rate was 10% (compounded semiannu- ally). The bond was issued on January 1, 2001, and matures on December 31, 2005 Interest P12-6 Ending Discount Coupon Payment Amortization Balance $ 40.00 40.09 Beginning Balance Expense $ 46.14 $ 928.92 $6.14 To Tirom $922.78 935.36 6.45

please solve P12-5 a,b,c,d by referring P12-4

P12-5 a,b,c,d

Answer 1

1.Please find below the bond discount amortization table.

Bond Discount Amortization Schedule
Period	Period						Net amount of discount
From	To	Beginning Balance	Interest Expenses	Coupon Payment	Discount Amortization	Ending Balance	at the end of period
Jan/1/2001	June/30/2001	87,538	5,252	4,000	1,252	88,790	11,210
Jul/1/2001	Dec/31/2001	88,790	5,327	4,000	1,327	90,117	9,883
Jan/1/2002	June/30/2002	90,117	5,407	4,000	1,407	91,524	8,476
Jul/1/2002	Dec/31/2002	91,524	5,491	4,000	1,491	93,015	6,985
Jan/1/2003	June/30/2003	93,015	5,581	4,000	1,581	94,596	5,404
Jul/1/2003	Dec/31/2003	94,596	5,676	4,000	1,676	96,272	3,728
Jan/1/2004	June/30/2004	96,272	5,776	4,000	1,776	98,048	1,952
Jul/1/2004	Dec/31/2004	98,048	5,883	4,000	1,883	99,931	69
Jan/1/2005	June/30/2005	99,931	5,996	4,000	1,996	101,927	(1,927)
Jul/1/2005	Dec/31/2005	101,927	6,116	4,000	2,116	104,043	(4,043)
Jan/1/2006	June/30/2006	104,043	6,243	4,000	2,243	106,286	(6,286)
Jul/1/2006	Dec/31/2006	106,286	6,377	4,000	2,377	108,663	(8,663)
Jan/1/2007	June/30/2007	108,663	6,520	4,000	2,520	111,183	(11,183)
Jul/1/2007	Dec/31/2007	111,183	6,671	4,000	2,671	113,854	(13,854)
Jan/1/2008	June/30/2008	113,854	6,831	4,000	2,831	116,685	(16,685)
Jul/1/2008	Dec/31/2008	116,685	7,001	4,000	3,001	119,686	(19,686)
Jan/1/2009	June/30/2009	119,686	7,181	4,000	3,181	122,867	(22,867)
Jul/1/2009	Dec/31/2009	122,867	7,372	4,000	3,372	126,239	(26,239)
Jan/1/2010	June/30/2010	126,239	7,574	4,000	3,574	129,813	(29,813)
Jul/1/2010	Dec/31/2010	129,813	7,789	4,000	3,789	133,602	(33,602)

The economic value of bond as on June 30, 2009 is US$122,867.

2. Accounting adjustment made in the books as market interest rate is 12% which is higher than coupon rate of 8%.

Company have to pay only U$4,000 (i.e.8%) as interest to the bondholders semi-annually, but they are allowed to deduct the amount @12% as an interest expenses. The additional amount of interest expenses are allowed to set aside to increase the book value of the bonds and reduce the amount of discount at bonds.

Journal entry for this interest adjustments:

Interest Expenses A/c Dr

To Discount on Bonds Payable

To Cash

3. Please find below the journal entries for retirement of bonds in the books of O'Brien