General Host; Accounting for a Bond Refunding
Year | 5% Bonds | 11% Bonds | 1975 | $1.695 | $2.233 | 1976 | $1.695 | $2.233 | 1977 | $1.695 | $2.233 | 1978 | $1.695 | $2.233 | 1979 | $1.695 | $2.233 | 1980 | $1.695 | $2.233 | 1981 | $1.695 | $2.233 | 1982 | $1.695 | $2.233 | 1983 | $1.695 | $2.233 | 1984 | $1.695 | $2.233 | 1985 | $1.695 | $2.233 | 1986 | $1.695 | $2.233 | 1987 | $1.695 | $2.233 | 1988 | $35.595* | $22.533* |
*Face value and interest
(In millions) 1. $33.9 million (Face value) X 5% (Coupon rate) = $1,695,000
2. $20.3 million (Face value) X 11% (Coupon rate) = $2,233,000
3. Assume that 11% is the market rate of interest in on January 1, 1975. Compute the present value at January 1, 1975 of all payments that will be made on the 5% bonds if they are not retired.
Principle $33.9 million, Interest $1.695 million, N 14, Rate 11% => $19,698,886 ≈ $19.7 million
Present value of bonds: $19.7 million
4. Again assuming that 11% is the market rate, compute the present value at January 1, 1975 of the payments that General Host will make on the 11% bonds if they replace the 5% bonds.
Principle $20.3 million, Interest $2.233 million, N 14, Rate 11% => $20,300,000
Present value of bonds: $20.3 million
5. Prepare the journal entry to record the exchange.
Bonds payable (old) $33.9 million Bonds payable (new) $20.3 million Gain on early extinguishment $13.6 million
II. Evaluating the exchange: Considering only the work you have done so far, and not considering the conversion feature: 1. What are the costs and benefits of the exchange for General Host’s bondholders?
Bondholders can get costs and benefits of $538,000 from increasing annual interest.
2. What are the costs and benefits of the exchange for General Host and its stockholders?
General Host and stockholders can get costs and benefits of $13.6 million from exchange bonds at a reduced price.
III. The conversion feature.
The article mentions that the
*Face value and interest
(In millions) 1. $33.9 million (Face value) X 5% (Coupon rate) = $1,695,000
2. $20.3 million (Face value) X 11% (Coupon rate) = $2,233,000
3. Assume that 11% is the market rate of interest in on January 1, 1975. Compute the present value at January 1, 1975 of all payments that will be made on the 5% bonds if they are not retired.
Principle $33.9 million, Interest $1.695 million, N 14, Rate 11% => $19,698,886 ≈ $19.7 million
Present value of bonds: $19.7 million
4. Again assuming that 11% is the market rate, compute the present value at January 1, 1975 of the payments that General Host will make on the 11% bonds if they replace the 5% bonds.
Principle $20.3 million, Interest $2.233 million, N 14, Rate 11% => $20,300,000
Present value of bonds: $20.3 million
5. Prepare the journal entry to record the exchange.
Bonds payable (old) $33.9 million Bonds payable (new) $20.3 million Gain on early extinguishment $13.6 million
II. Evaluating the exchange: Considering only the work you have done so far, and not considering the conversion feature: 1. What are the costs and benefits of the exchange for General Host’s bondholders?
Bondholders can get costs and benefits of $538,000 from increasing annual interest.
2. What are the costs and benefits of the exchange for General Host and its stockholders?
General Host and stockholders can get costs and benefits of $13.6 million from exchange bonds at a reduced price.
III. The conversion feature.
The article mentions that the