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

The following are the Journal Entries in the Books of DIOMEDIC Inc.

1. 2020-03-2015 Bank A/c Dr $35m

To 7.02% Bonds A/c $35m

(Being Bonds Issued)

2.2020-09-2015 Interest on 7.02% Bonds A/c Dr $1.2285m

To 7.02% Bonds A/c $1.2285m

(Being Interest on Bonds recorded)

7.02% Bonds A/c Dr $1.2285m

To Bank A/c $1.2285m

(Being Interest Payment made)

3.Balance Sheet Extract as on 2020-12-2015

Non Current Liabilties

7.02% Bonds $35m

Current Liabilities

Accrued Interest on 7.02% Bonds $061425m

($1.2285m)*0.5

4.2020-03-2021 7.02% Bonds A/c Dr $35m

Expenses on issue of New Bonds A/c   Dr $1.4m

To 6.75% Bonds A/c $35m

To Bank A/c ($35m*4%) $1.4m

( Being Old Bonds being Called and New Bonds Being

Issued in its place)

It is assumed that the face value of Bonds is $100 per bond.