Question

DECISION-MAKING ACROSS THE ORGANIZATION - 10-8 on January 1, 2015, Picard Corporation issued $3,000,000 5-year, 8% bonds at 97. ebonds pay interest annually on January 1. By January 1, 2017, the market rate of interest for bonds of risk similar to those of Picard Corporation had risen. As a result, the market price bonds was $2,500,000 on January 1, 2017-below their carrying value of $2,946,000. Geoff Marquis, president of the company, suggests repurchasing all of these bonds in the open 2,500,000 (face value) of new 10-year, 12% bonds at par. The president asks you, as con- n market at the $2,500,000 price. But to do so the company will have to issue troller, "What is the feasibility of my proposed repurchase plan?" Instructions With the class divided into groups, answer the following. (a) Prepare the journal en ing journal entry to issue the new 10-year bonds economic factors that you believe should be considered for his repurchase proposal. (b) Prepare a short memo to the president in response to his request for advice. List the

Answer 1

1.

Date	Account Titles	Debit	Credit
Jan 1, 2017	Bonds Payable	3000000
	Cash		2500000
	Discount on bonds payable-unamortized		54000
	Gain on redemption of bonds		446000
	[Redemption of bonds]
Jan 1,2017	Cash	2500000
	Bonds payable		2500000
	[Issue of new bonds]

2. Economic factors to be considered for repurchase proposal:

(I) If the economic conditions are robust and bullish, the firm may not find many bond takers since investors would prefer equity as it will yield higher returns. If the conditions are unfavourable, the bonds issue will be seamless as it is a risk free investment.

(ii) Also , in case of non favourable conditions the repayment of bonds can be difficult due to constrained cash flows.

(iii) In the given scenario the market rates for similar bonds has risen, the company must consider the interest rate of the proposed bonds and if it is in tune with the market rates

(iv) The inflation conditions must be considered as during periods of inflation and the economy is sluggish, the interest rates are higher.