Question

The founder of Frenza asks us to assist her in accounting and analysis of the corporation's bonds, which have an annual contract rate of 8%. She wants to know the business and accounting implications of further debt issuances as she looks for ways to finance the growth of Frenza, The following Tableau Dashboard is provided to help us address her questions and provide recommendations for her business decisions. 1(a). Prepare journal entries to record the issuance of Frenza bonds on January 1, Year 1. 1(b). Prepare journal entries to record the first and second interest payments on June 30, Year 1, and December 31, Year 1. 1(c). Prepare journal entries to record the maturity of the bonds on December 31, Year 3. 2. Erenza needs to raise money to purchase new equipment. The founder is concerned about losing ownership control of her company. Which of the following ways to raise money would we recommend? 3. Frenza needs to raise money to purchase more inventory. The founder is concerned about the company's ability to make required cash payments when cash flows are low. Which of the following ways to raise money would we recommend?

Answer 1

1

(Assumption -  100 Bonds of $1000 each are issued at 8%)

1a

Year 1

Jan 1 - Bank a/c Dr. (100* $1000) 100000

To 8% Bonds A/c 100000

(Being 100 Bond issued @ $1000 each)

1b

June 30 - Interest on Bonds Dr. (100* $1000)*8%*6/12) 4000

To Bank A/c 4000

(Being 1st semiannual interest Paid on Bond)

Dec 31 - Interest on Bonds Dr. (100* $1000)*8%*6/12) 4000

To Bank A/c 4000

(Being 2nd semiannual interest Paid on Bond)

Dec 31 P&L Dr.    (4000+4000)    8000

To Interest on Bonds 8000

(Being Interest charged to P&L)

1c

Year 3

Dec31 - 8% Bonds A/c

To Bank

(Being Bond redeemed)

2

It is being assumed that ways to raise money are Bond/Debt or Equity Shares

In the given case the founder is concerned about loosing control. We would recommend to raise money by Bond as bondholder does not have any ownership control of the company like equity shareholder.

3

It is being assumed that ways to raise money are Bond/Debt or Equity Shares

In the given case the founder is concerned about company's ability to make required cash payments when cash flows are low. We would recommend to raise money by Equity Shares as there is no need to make any fix payment to equity shareholder. Only dividend is paid on equity shares, when company wants has sufficient profit or reserves