Analysis Case 14-4 Issuance of bonds LO14-2 The following appeared in the Octobe

Question

Analysis Case 14-4 Issuance of bonds LO14-2 The following appeared in the October 15, 2018, issue of the Financial Smarts Journal This announcement is not an offer of securities for sale or an offer to buy securities New Issue October 15, 2018 $750,000,000 CRAFT FOODS, INC 775% Debentures Due October 1, 2028 Price 99.57% plus accrued interest if any from date of issuance Copies of the prospectus and the related prospectus supplement may be obtained from such of the undersigned as may logally offer these securities under applicable securities laws. Keegan Morgan &Co.; Inc Coldwell Bros.&Co.; Robert Stacks & Co Sherwin-William & Co Required 1. Explain what is being described by the announcement. 2. Can you think of a paychological reason for the securities to be priced as they are? 3. What are the accounting considerations for Craft Foods, Inc.? Deseribe how Craft recorded the sale

Explanation / Answer

1. The announcement describes issuance of debt instruments by Craft Foods. Craft Foods is issuing debentures of a total amount of $750,000,000. The debentures are being offered at discount of 0.43% (100-99.57). The debentures will pay a fixed rate of 7.75% per year and will be redeemed on 1st October 2028.

2. The securities are priced at 99.57% i.e. lower than the face value of 100%. The psychological aspect here is that the debentures have an odd price i.e. they are priced a little less than the nearest round number of 100 (which is also the face value). This is done in order to create a psychological impact in the mind of the buyers of these debentures. This is because investors (and consumers) tend to perceive “odd prices” as being significantly lower than they actually are.

3. The 2 journal entries would be:

Calculations:

Bank account is debited with: 750,000,000*99.57% = 746,775,000

Discount on debentures = 750,000,000 - 746,775,000 = 3,225,000

Particulars Debit Credit (i) Bank account 746,775,000.00 Debenture application and Allotment account 746,775,000.00 (ii) Debenture application and Allotment account 746,775,000.00 Discount on debentures 3,225,000.00 Debentures account 750,000,000.00

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