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Communication Nordbock Inc. reports the following outstanding bond issue on its December 31, 20Y1, balance sheet: $1,000,000, 7%, 10-year bonds that pay interest semiannually. The bonds have been outstanding for five years and were originally issued at face amount. The company is considering redeeming these bonds on January 1, 20Y2, at 103 and issuing new $1,000,000, 5%, live-year bonds at their face amount. These bonds would pay interest semiannually on June 30 and December 31. Write a brief memo to Liz Nolan, the chief financial officer, discussing the costs of redeeming the existing bonds, the proceeds from issuing the new bonds, and whether this is a good financial decision.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 14, Problem 14.3CP
Textbook Problem

Communication

Nordbock Inc. reports the following outstanding bond issue on its December 31, 20Y1, balance sheet:

$1,000,000, 7%, 10-year bonds that pay interest semiannually.

The bonds have been outstanding for five years and were originally issued at face amount. The company is considering redeeming these bonds on January 1, 20Y2, at 103 and issuing new $1,000,000, 5%, live-year bonds at their face amount. These bonds would pay interest semiannually on June 30 and December 31.

Write a brief memo to Liz Nolan, the chief financial officer, discussing the costs of redeeming the existing bonds, the proceeds from issuing the new bonds, and whether this is a good financial decision.

Expert Solution
To determine

Bond investment: Bond investments are debt securities which pay a fixed interest revenue to the investor.

To draft: A memo to LN, chief financial officer of Incorporation N, explaining the financial issues related with redeeming of the bonds and issue of new bonds, and whether the redemption and issue is correct financial decision or not

Explanation of Solution

Prepare a memo to the LN, chief financial officer (CFO) of Incorporation N, explaining the financial issues related with redeeming of the bonds and issue of new bonds.

MEMO

Date:    February 25, 2018

To:    LN, CFO, Incorporation N

From:    Ms J

Subject:  Redemption old bonds and issue of new bonds

To conclude whether the financial decision is good or not, first the redemption of 7% old bonds should be compared to the new issue of 5% bonds. The following things should be considered:

  • Proceeds from new issue
  • Cost of redeeming old bonds
  • Cost of interest expense of old bonds and new bonds (any interest savings)

The following table shows the interest expense of both the bonds and the interest savings:

Details 7% Bonds (Old) 5% Bonds (New)
Face value of the bonds $1,000,000 $1,000,000
Rate of interest × 7% × 5%
Payment terms (semiannual) × 0.5 × 0.5
Semiannual interest expense $35,000 $25,000

Table (1)

So, the new issue would save $10,000 ($35,000$25,000) on one semiannual interest period. Since the old bonds have 5 years to maturity, the interest savings for 5 years on 2 semiannual periods would be $100,000 ($10,000×2×5)

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Chapter 14 Solutions

Accounting
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Ch. 14 - Alternative financing plans Frey co. is...Ch. 14 - Alternative financing plans Brower co. is...Ch. 14 - Issuing bonds at face amount On January 1, the...Ch. 14 - Issuing bonds at face amount On January 1, the...Ch. 14 - Issuing bonds at a discount On the First day of...Ch. 14 - Issuing bonds at a discount On the first day of...Ch. 14 - Discount amortization Using the bond from Practice...Ch. 14 - Discount amortization Using the bond from Practice...Ch. 14 - Issuing bonds at a premium On the first day of the...Ch. 14 - Issuing bonds at a premium On the first day of the...Ch. 14 - Premium amortization Using the bond from Practice...Ch. 14 - Premium amortization Using the bond from Practice...Ch. 14 - A Redemption of bonds payable A 1,500,000 bond...Ch. 14 - Redemption of bonds payable A 1,200,000 bond issue...Ch. 14 - Journalizing installment notes On the first day of...Ch. 14 - Journalizing installment notes On the first day of...Ch. 14 - Times interest earned Berry Company reported the...Ch. 14 - Times interest earned Aver ill Products Inc....Ch. 14 - Effect of financing on earnings per share Domanico...Ch. 14 - Evaluate alternative financing plans Based on the...Ch. 14 - Corporate financing The financial statements for...Ch. 14 - Bond price Stone Energy Corporation's 7.5% bonds...Ch. 14 - Entries for issuing bonds Thomson Co. products and...Ch. 14 - Entries for issuing bonds and amortizing discount...Ch. 14 - Entries for issuing bonds and amortizing premium...Ch. 14 - Entries for issuing and calling bonds; loss Adele...Ch. 14 - Entries for issuing and calling bonds; gain Emil...Ch. 14 - Entries for installment note transactions On the...Ch. 14 - Entries for installment note transactions On...Ch. 14 - Entries for installment note transactions On...Ch. 14 - Reporting bonds At the beginning of the current...Ch. 14 - Times interest earned The following data were...Ch. 14 - Times interest earned Loomis, Inc. reported the...Ch. 14 - Times interest earned lacouva Company reported the...Ch. 14 - Present value of amounts due Tommy John is going...Ch. 14 - Present value of an annuity Determine the present...Ch. 14 - Present value of an annuity On January 1, you win...Ch. 14 - Present value of an annuity Assume the same data...Ch. 14 - Present value of bonds payable; discount Pinder...Ch. 14 - Present value of bonds payable; premium Moss Co....Ch. 14 - Amortize discount by interest method On the first...Ch. 14 - Amortize premium by interest method Shunda...Ch. 14 - Compute bond proceeds, amortizing premium by...Ch. 14 - Compute bond proceeds, amortizing discount by...Ch. 14 - Effect of financing on earnings per share Three...Ch. 14 - Bond discount, entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Entries for bonds payable and installment note...Ch. 14 - Bond discount, entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Effect of financing on earnings per share Three...Ch. 14 - Bond discount, entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Entries for bonds payable and installment note...Ch. 14 - Bond discount entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Ethics in Action CEG Capital Inc. is a large...Ch. 14 - Communication Nordbock Inc. reports the following...Ch. 14 - Present values Alex Kelton recently won the...Ch. 14 - Preferred stock vs. bonds Xentec Inc. has decided...Ch. 14 - Financing business expansion You hold a 25% common...Ch. 14 - Times interest earned The following financial data...

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