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
- How much did JCN receive on the issue date?
- How did JCN record the issuance of the bonds in its ledger?
- How would JCN record the first payment on its bonds?
- 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?
- How much interest expense for the bonds would be reported on the income statement for the year after the issuance of the bonds?