Question

Interest Expense Decrease Unpaid Cash ONS. EXERCISES. PROBLEMS, AND CA! Date Payment $28035 1/1/2003 2/1/2003 3/1/2003 4/1/2003 nswers to the nearest arestado b. Prepare the journal entry to record the mortgage. Round answe c Prepare the entry for the first payment. d. What will be the total interest paid over the life of the mortgage? viannual coupon bond arket value of the bo July 1 of each year. P12-2 On January 1, 2004, Gerry Corporation issued $10,000,000 8% semiann... The bonds were issued at face value. By December 31, 2006, the market had fallen to $9,875,200. Interest payment dates are January 1 and July 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? nds to fall below the face 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 Decemb 2006? f. Assume that Gerry retires the bonds on December 31, 2006, by buying the bonde the open market. What journal entry would be made to retire the bonds? g. Indicate the impact of the bond retirement on Gerry's net income and debt-to. equity ratio. h. Explain why management may sometimes retire bonds when it is not in the best in- terest of the company's stockholders. ae balance sheet and income statement of Coca-Cola Company and Subsidiaries at D mber 31, 1999, are as follows: Coca-Cola Company and Subsidiaries Income Statement (in millions) erating revenues goods sold For the Year Ended 12/31/99 Tofit administra $19 805

P12-2 (A) through (H)

Answer 1

Solution:

Journal Entry a & b

	Date	General Journal	Debit	Credit
a)	Jan.1, 2004	Cash	$10,000,000
		Bonds Payable		$10,000,000
		(To record bonds issued at face value)
b)	July.1, 2004	Interest Expense (Face value 10,000,000 * 8% * 1/2)	$400,000
		Cash or Interest Payable		$400,000
		(To record first coupon payment)

c) Book Value of Bonds on Dec 31, 2006

Book Value of Bonds on Dec 31, 2006 = Since the bonds are issued at face value, the bonds book value on Dec 31, 2006 is the face value of bonds = $10,000,000

d) Factors that would have caused the market value of the bonds to fall below the face value

There are mainly two factors that caused the market value to fall below the face value

(i) Change in interest rate – It is also known as market risk.

(ii) Change in credit quality

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