Bond Basks-Straight-line Method, Retirement, and Conversion Golden Corporation h
ID: 2452079 • Letter: B
Question
Bond Basks-Straight-line Method, Retirement, and Conversion Golden Corporation has $20,000,000 of 10.5 percent. 20-year bonds dated June 1, 2010, with interest pavement dates of May 31 and ten years the bonds are callable at 104, and cache $1,000 bond is convertible into 25 shares of $20 par value common stock. The company's fiscal year ends on December 31. It uses the straight line method to amortize discounts. Required Assume the bonds arc issued at 103 on June 1, 2010. How much cash is received? How much is Bonds Payable? What is the difference between a and b called and how much is . With regard to the bond Interest payment on November MJ. How much cash is paid in interest? How much is the amortization? How much is interest expense? Assume the bonds arc issued at 97 on June 1. 2010 How much cash is received? How much is Bonds Payable? What is the difference between a and b called and how much is it. d. With regard to the bond interest payment on November 30,2010: How much cash is paid in interest? How much is the amortization? How much is interest expense? Assume the issue price in requirement 1 and that the bonds are called and retired ten years later. How much cash will have to be paid to retire the bonds? Is there i gain or loops on the retirement, and if so, how much is it? Assume the issue price in requirement 2 and that the bonds are converted to common stock ten years later , Is there a gain or loss on the conversion, and n so, how much is it? How many shares of common stock are issued in exchange for the bonds? In dollar amounts, how does this transaction affect the total liabilities L in the total stockholders' equity of the company? In your answer, show the effects on four accounts. Assume that after ten years, market interest rates have dropped and that the price of the company's common stock dropped significantly and that price of the company's common stock has risen significantly. Also assume that management wants to improve its credit rating by reducing its debt to equity ratio and that it needs what cash it has for expansion. Which approach would management prefer the approach and result in requirement 3 or 4? Explain your answer, what would be a disadvantage of the approach you chose?Explanation / Answer
1
a) Cash Recieved = 103%*20,000,000
Cash Recieved = $ 20,600,000
b) Bonds Payable = $ 20,000,000
c) Difference between a &b , Bonds Premium = 20600000 - 20000000
Difference between a &b , Bonds Premium = $ 600,000
d)
1) Interest Payment = Bonds Payable * coupon rate*1/2
Interest Payment = 20,000,000*10.5%*1/2
Interest Payment = $ 1,050,000
2) Amortisation of bond Premium =Bonds Premium/ (No of life*2)
Amortisation of bond Premium = 600000/(20*2)
Amortisation of bond Premium = 15000
3) Interest Expenses = Interest Payment +Amortisation of bond Premium
Interest Expenses = 1050000+15000
Interest Expenses = $ 1,065,000