Question

On 2020 03 15 DIOMEDIC Inc. issued $35 m of 10-year, 7.02% bonds, priced to yield 7.15% and callable in the first five years at 100.4. The bonds carried a BBB rating and paid a semiannual coupon. 2023 03 15, after paying the coupon, DIOMEDIC refi’d the bonds with a new borrowing that had the same maturity, principal and coupon schedule as the first borrowing. For items # 1-4 on your memo, assume that transaction costs were not material. The new bonds were priced to yield 668 bps and carried a 6.75% coupon rate.

Answer these:

1. Journal entry to record 2020 03 15 issuance

2. Journal entry to record 2020 09 15 interest accrual  

3. What amount would DIOMEDIC report on its 2020 12 31 Balance Sheet for Bonds / P (net)?

4. Journal entry to record 2023 03 15 ReFi transactions

5. What amount would DIOMEDIC report on its 2023 12 31 Balance Sheet for Bonds / P (net)?

6. Questions, professional email          Would DIOMEDIC report a gain or a loss on the transaction? From an economic perspective, was the company “better off” or “less well off” as a result of replacing the 2020 issue of bonds with the 2023 issue? What (if any) is the 2020 03 15 cash flow? Suppose the transactions costs had been 60 bps of the face amount of principal – how would that have affected your reasoning? Explain your answers and cite evidence.

Answer 1

Accounting Entries and Records For Transactions in Bonds
Answer To Question No.1
Journal Entry for Issue of Bond on Premium
Since the Interest Yied is More than the coupon rate the company has issued Bond at Discount
Date	Particulars		Debit	Credit
15/03/2020	Cash		3436364
	Discount on Bond Payable		63636
	Bond Payable			3500000
	(Being Recording of Issuance of Bond at Discount)
Answer To Question No.2
Journal Entry to Record 15/09/2020 interest Accrual
Date	Particulars		Debit	Credit
15/09/2020	Bond Interest Expense		122850
	Cash			119668.2
	Discount on Bond Payable			3181.8	(amortised for 10 years)
	(Being Interest accrued for 1st Half year)
Answer To Question No.3
Amounts to be Recorded in Balance Sheet at year end 31/12/2020
Long Term Liability
Bond Payable			3500000
Less Discount on Bond Payable			-59128.5	(3181.8+1325.75) - Accrual for part of period upto 31/12/2020
			3440872
Current Liability
Interest Payable on Bond			71662.5	(Interest accrued For the period From 15/09/2020 to 31/12/2020 i.e. 105 days)
Answer To Question No.4
Journal Entry to Record Refinacing Transactions
Date	Particulars		Debit	Credit
15/03/2023	Cash		3536677
	Premium on Bonds			36677
	Bonds Payable			3500000
	(Being New Bonds Issued for Premium)
15/03/2020	Bonds Payable		3500000
	Premium on Bonds		36677
	Cost of Refinancing		19747
	Discount on Bond Payable			42424
	Cash			3514000
	(Being Repayment of Earlier Bonds)
Answer To Question No.5
Amount to be recorded on 31/12/2023
Long Term Liability
Bond Payable			3500000
Current Liability
Interest Payable on Bond			68906.25	(Interest accrued For the period From 15/09/2023 to 31/12/2023 i.e. 105 days)
Answer To Question No.6
Company has to report loss on transaction on account of refinancing whereas in economic perspective the company will have better pay off in long term for making such decision as interest cost will be saved upto 66150/-
Company had to pay 21000 more in cash if they had cost of 60 bsp on face value
Even If transaction cost of 21000 had been while issue of bond company will be getting benefit out of refinancing bond