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JCN Computers
Author(s):
Nanni, Alfred J.
Functional Area(s):
   Financial Accounting
Setting(s):
   For Profit
Difficulty Level: Beginner
Pages: 1
Teaching Note: Available. 
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First Page and the Assignment Questions:

JCN Computers was a manufacturer of general-purpose mainframe computers. In 1996, JCN funded an expansion through a $100 million bond offering. JCN issued 100,000 convertible debentures due in ten years. The bonds employed the standard face value of $1,000 and used the prevailing market rate on the decision date (13%) as the coupon rate.

By the time the bonds came to market, however, the prevailing interest rate for bonds in JCN's risk class had fallen to 12%. The selling price of JCN's bonds was determined by the combination of this market rate and the bonds' payment schedule.

The total bond issue pays $6.5 million every six months (coupon rate of 13% times face value of $100 million time one half year). At the issue date, this cash flow would occur 20 times (two times a year times ten years). Furthermore, at the end of ten years, the total face value would be paid out.

Assignment

  1. How much did JCN receive on the issue date?
  2. How did JCN record the issuance of the bonds in its ledger?
  3. How would JCN record the first payment on its bonds?
  4. At the end of one year (one day away from the next payment date), JCN prepared a set of financial statements. What would be adjusting entry be for the bonds?
  5. How much interest expense for the bonds would be reported on the income statement for the year after the issuance of the bonds?