Question

In: Accounting

Streamland SA started producing a new mini series featuring super heroes with useless powers. The management...

Streamland SA started producing a new mini series featuring super heroes with useless powers. The management board considered various financing options. The CFO, Sam Yang, suggested to issue convertible bonds, an instrument that had not been used by the company before. The other board members were hesitant at first but eventually agreed that convertible bonds were the best option to finance this production. Therefore, Streamland SA issued €18,000,000 of 8%, 5-year convertible bonds on January 1, 2020, at 95 with interest payable on December 31. Each of the 18,000 €1,000 bonds is convertible into 10 ordinary shares (par value of €1). Using the prevailing market interest rates at the issuance date for similar non-convertible bonds, the bonds would have been sold at 90. Any bond premium or discount is amortized annually using the effective-interest method.

At maturity, the bond has been repurchased. Prepare the schedule of bond amortization for the convertible bonds for all years (2020 to 2024) and the journal entry(ies) for the last year of the bond schedule. (15p)

but how do i know the market interest rate?

Solutions

Expert Solution

Face Value     18,000,000.00
Coupon Rate 8%
Coupon Payment       1,440,000.00
Period 5
Issued Price = PV = 18,000,000 x 95%     17,100,000.00
Bonds issued at discount (18,000,000 - 17,100,000)          900,000.00
Face Value     18,000,000.00
Coupon Rate 8%
Coupon Payment       1,440,000.00
Period 5
Issued Price = PV = 18,000,000 x 90%     16,200,000.00
Market Interest rate (non convertible bond = RATE(5,1440000,-16200000,18000000) 10.68%
This is as per the question requirement
A B C D = C-B E F G
Period Interest Payment = 8% x face value Interest Expenses = 10.68% x prev. Yr Carrying value Amortization of Bonds Discount Credit Balance in bonds discount Account Credit Bal in Bonds Payable Carrying Value of Bonds F- E
Credit Cash Debit Interest Expense Credit Bond Discount
Jan-20          900,000.00        18,000,000.00   17,100,000.00
31-Dec-20       1,440,000.00       1,827,005.90        387,005.90          512,994.10        18,000,000.00   17,487,005.90
31-Dec-21       1,440,000.00       1,868,354.56        428,354.56            84,639.54        18,000,000.00   17,915,360.46
31-Dec-22       1,440,000.00       1,914,121.01        474,121.01         (389,481.47)        18,000,000.00   18,389,481.47
31-Dec-23       1,440,000.00       1,964,777.26        524,777.26         (914,258.74)        18,000,000.00   18,914,258.74
31-Dec-24       1,440,000.00       2,020,845.75        580,845.75      (1,495,104.49)        18,000,000.00   19,495,104.49
In this schedule I have used carrying value for non convertible bonds.
A B C D = C-B E F G
Period Interest Payment = 8% x face value Interest Expenses = 10.68% x prev. Yr Carrying value Amortization of Bonds Discount Credit Balance in bonds discount Account Credit Bal in Bonds Payable Carrying Value of Bonds F- E
Credit Cash Debit Interest Expense Credit Bond Discount
Jan-20       1,800,000.00        18,000,000.00   16,200,000.00
31-Dec-20       1,440,000.00       1,730,847.70        290,847.70       1,509,152.30        18,000,000.00   16,490,847.70
31-Dec-21       1,440,000.00       1,761,922.58        321,922.58       1,187,229.73        18,000,000.00   16,812,770.27
31-Dec-22       1,440,000.00       1,796,317.57        356,317.57          830,912.15        18,000,000.00   17,169,087.85
31-Dec-23       1,440,000.00       1,834,387.42        394,387.42          436,524.73        18,000,000.00   17,563,475.27
31-Dec-24       1,440,000.00       1,876,524.73        436,524.73                     0.00        18,000,000.00   18,000,000.00
Journal Entries
Bonds Payable $ 18,000,000.00
           Cash $ 18,000,000.00

Related Solutions

An oil company is drilling a series of new wells on the perimeter of a producing...
An oil company is drilling a series of new wells on the perimeter of a producing oil field. About 17% of the new wells will be dry holes. Even if a new well strikes oil, there is still uncertainty about the amount of oil produced: 40% of new wells that strike oil produce only 2,200 barrels a day; 60% produce 6,200 barrels per day. a. Forecast the annual cash revenues from a new perimeter well. Use a future oil price...
Mini-Case Study: Project Management at Global Green Books Publishing Global Green Books Publishing was started two...
Mini-Case Study: Project Management at Global Green Books Publishing Global Green Books Publishing was started two years ago by two friends, Jim King and Brad Mount, who met in college while studying in Philadelphia, USA. In the new business, Jim focused on editing, sales, and marketing while Brad Mount did the electronic assembly and publishing of books for Global Green Books. Their business was successful and profitable in the first two years, largely due to contracts from two big businesses....
The Super-Pop Popcorn Company requires a new popcorn plant in Asia. Management collects data related to...
The Super-Pop Popcorn Company requires a new popcorn plant in Asia. Management collects data related to each site as follows in the table below. Where the plant should be built? Section 2: The Super-Pop Popcorn Company requires a new popcorn plant in Asia. Management collects data related to each site as follows in the table below. Where the plant should be built? Factor Weight Score India Jordan Oman Labor Attitude 0.3 60 70 65 Corn Quality 0.4 70 40 55...
A convenience store recently started to carry a new brand of soft drink. Management is interested...
A convenience store recently started to carry a new brand of soft drink. Management is interested in estimating future sales volume to determine whether it should continue to carry the new brand or replace it with another brand. The following table provides the number of cans sold per week. Use both the trend projection with regression and the exponential smoothing​ (let alphaαequals=0.40.4 with an initial forecast for week 1 of 574574​) methods to forecast demand for week 1313. Compare these...
A convenience store recently started to carry a new brand of soft drink. Management is interested...
A convenience store recently started to carry a new brand of soft drink. Management is interested in estimating future sales volume to determine whether it should continue to carry the new brand or replace it with another brand. The following table provides the number of cans sold per week. Use both the trend projection with regression and the exponential smoothing​ (let alphaαequals=0.4 with an initial forecast for week 1 of 601) methods to forecast demand for week 13. Compare these...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT