On January 1, 2010, Carlin Corporation issued $2,400,000 of 5 year, 8% bonds at 95; the bonds pay interest semiannually on July 1 and January 1. By January 1, 2012, the market rate of interest for bonds of risk similar to those of Carlin Corporation had risen. As a result, the market value of these bonds was $2,000,000 on January 1, 2012—below their carrying value. Andrea Carlin, president of the company, suggests repurchasing all of these bonds in the open market at the $2,000,000 price. To do so the company will have to issue $2,000,000 (face value) of new 10 year, 11% bonds at par. The president asks you, as controller, “What is the feasibility of my proposed repurchase plan?”
With the class divided into groups, answer the following.
(a) What is the carrying value of the outstanding Carlin Corporation 5 year bonds on January 1, 2012? (Assume straight line amortization.)
(b) Prepare the journal entry to retire the 5 year bonds on January 1, 2012. Prepare the journal entry to issue the new 10 year bonds.
(c) Prepare a short memo to the president in response to her request for advice. List the economic factors that you believe should be considered for her repurchase proposal.