Several years ago, Huergo Dooley Corporation (HDC) issued $2,000,000 face value,

Question

Several years ago, Huergo Dooley Corporation (HDC) issued $2,000,000 face value, 8% semiannual coupon bonds on the market initially priced to yield 10% compounded semiannually. The bonds require HDC to make semiannual payments of 4% of face value on June 30 and December 31 of each year. The bonds mature on December 31, 2012. See the Present and Future Value Tables from the Appendix for help in solving this item. When required, round your answers to the nearest dollar.

On January 1, 2009, these bonds trade in the market at a price to yield 6%, compounded semiannually. On this date, HDC repurchased 20% of these bonds on the open market and retired them. Give the journal entry to record the repurchase.

After some calculation, the Journal Entries consist of:

Bonds Payable (Dr)

Loss on Repurchase of Bonds (Cr)

Cash (Cr)

(The cash value = $428,079, but the BP is NOT 2,000,000 * 20% = $400,000)

Explanation / Answer

For determining BP carrying value we have to first determine its Price at 10% compouned semi-annually So, its value will be: Present Value of an Annuity of $80,000* for 8 Periods at 5% per Period: $80,000 x 6.46321 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $517,057 Present Value of $2 million for 8 Periods at 5% per Period: $2000000 x .67684 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,353,680 Carrying value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,870,737 *2000000 x 4% = 80,000 For current market price we will follow the same process using 6% compounded semi-annually Present Value of an Annuity of $80,000* for 8 Periods at 3% per Period: $80,000 x 7.01969 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $561,575 Present Value of $2 million for 8 Periods at 3% per Period: $2000000 x .78941 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,578,820 Current price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,140,395 Bonds Payable (Dr)(1870737 x 20%) $ 374,147.40 Loss on Repurchase of Bonds (Cr) $    53,931.60 Cash (Cr) (2140395 x 20%) $      428,079.00

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