Global Limited issued $2,000,000 of bonds on January 1, 2021 with a stated interest rate of 10% and effective interest rate of 8%. The bonds were issued at a discount. Ladybird Inc. issued $20,000,000 of convertible bonds on January 1, 2020 with a stated interest rate of 8% and effective interest rate of 7%. On January 1, 2023, all outstanding bonds were either converted to shares or repurchased. The Pigeon National Bank agreed to restructure a $2,000,000 loan to Duckling Company on January 1, 2021, reducing the principal to $1,500,000 and interest rate to 4%.
Global Limited issued $2,000,000 of bonds on January 1, 2021 with a stated interest rate of 10% and effective interest rate of 8%. The bonds were issued at a discount. Ladybird Inc. issued $20,000,000 of convertible bonds on January 1, 2020 with a stated interest rate of 8% and effective interest rate of 7%. On January 1, 2023, all outstanding bonds were either converted to shares or repurchased. The Pigeon National Bank agreed to restructure a $2,000,000 loan to Duckling Company on January 1, 2021, reducing the principal to $1,500,000 and interest rate to 4%.
Global Limited issued $2,000,000 of bonds on January 1, 2021 with a stated interest rate of 10% and effective interest rate of 8%. The bonds were issued at a discount. Ladybird Inc. issued $20,000,000 of convertible bonds on January 1, 2020 with a stated interest rate of 8% and effective interest rate of 7%. On January 1, 2023, all outstanding bonds were either converted to shares or repurchased. The Pigeon National Bank agreed to restructure a $2,000,000 loan to Duckling Company on January 1, 2021, reducing the principal to $1,500,000 and interest rate to 4%.
Global Limited issued $2,000,000 of bonds on January 1, 2021 with a stated interest rate of 10% and effective interest rate of 8%. The bonds were issued at a discount. Ladybird Inc. issued $20,000,000 of convertible bonds on January 1, 2020 with a stated interest rate of 8% and effective interest rate of 7%. On January 1, 2023, all outstanding bonds were either converted to shares or repurchased. The Pigeon National Bank agreed to restructure a $2,000,000 loan to Duckling Company on January 1, 2021, reducing the principal to $1,500,000 and interest rate to 4%.
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ACCT3103 - Intermediate Financial Accounting II
Assignment 1
Question 1 (Issuance of bonds)
Global Limited issued $2,000,000 bonds on January 1, 2021 to finance the acquisition of an asset. Each bond has a par value of $1,000, a stated interest rate 10%, and the bonds' maturity date is December 31, 2023. The bond pays interest every June 30 and December 31. The effective interest rate is 8%.
Required: 1. What is the price of the bonds at January 1, 2021? Is the bond issued at a discount or premium? 2. Prepare the journal entry to record the issuance of bonds on January 1, 2021. 3. Prepare the journal entries to record interests on June 30, 2021 and December 31, 2021. Question 2 (Issuance, conversion and repurchase of convertible bonds) On January 1, 2020, Ladybird Inc. issued 20,000 of its 5-year, $1,000 face value, 8% convertible bonds at an effective interest rate (yield) of 7% with interest payable every December 31. (Hint: A similar debt instrument without the option feature was issued at 9% yield.) The bonds are convertible at the investor’s option into Ladybird’s ordinary shares of 10 shares for each bond.
Required: 1. Prepare the journal entry for Ladybird on January 1, 2020 regarding the bond issuance. Show calculations.
2. Interests were paid on December 31, 2020, December 31, 2021 and December 31, 2022. On January 1, 2023, all outstanding bonds were converted when the market values per unit of the bonds and ordinary shares were quoted as 106 and $109, respectively. Prepare the journal entry for Ladybird on January 1, 2023 when all outstanding bonds were converted. Show calculations.
3. Same as (b) above, but now assume that on January 1, 2023, instead of bond conversion, Ladybird repurchased all outstanding bonds from the market when the market interest rate of a similar bond without the option feature was 8%. Prepare the journal entry for such transaction. Show calculations. Question 3 (Troubled debt restructuring) The Pigeon National Bank has a note receivable of $2,000,000 from the Duckling Company that it is carrying at face value and is due on December 31, 2021. Interest on the note is payable at 6% each December 31. The Duckling Company paid the interest due on December 31, 2019. On January 1, 2021, the company asked the bank to modify the terms of the note because of its financial difficulties. After negotiation the bank agreed to: a. Forgive the interest accrued for the year just ended. b. Reduce the interest rate to 4%. c. Reduce the unpaid principal amount to $1.5 million and to be repaid at the end of 2022.
Required: Prepare the journal entries by the Duckling Company necessitated by the restructuring of the debt at (1) January 1, 2021, (2) December 31, 2021, and (3) December 31, 2022. (Assuming the market interest rate at the date of restructuring is 4%).
