On April 1, Year 1, ABC Inc

Essay

On April 1, Year 1, ABC Inc., a publicly traded company, issued $12,000,000 worth of 5-year, convertible bonds at 105.The bonds pay interest semi-annually, at a stated annual rate of 6%, each June 30th and December 31st.The market rate for bonds was 7%.The bonds were dated January 1, Year 1.
At the date of issue, bond issue costs of $100,000 were incurred.These costs are to be amortized on straight-line basis at every interest payment date.
Part 1:
Prepare the required journal entries on the following dates:
April 1, Year 1.June 30th, Year 1.
December 31st, Year 3.
Part 2:
Assume that on March 31st, Year 4, half of the bondholders decided to convert their bonds to common shares.These bondholders received the interest they were due at that date.
Required:
Prepare the required journal entries at that date.Assume that any unamortized bond issue costs
relating to these bonds only were expensed on that date.
Part 3:
Assume that on December 31st, Year 4, ABC Inc.decided to induce (force)conversion of the remaining bonds, which were trading at 98 on that date, by giving the bondholders an additional
$400,000.Do not record the interest expense accrual or expensing of bond issue costs on this date for this part (assume that these entries have already been made).
Required:
Prepare the required journal entries at that date.
Part 4:
It is now January 1, Year 1, and Borrower Inc.is in financial distress.It currently holds long-term no payable due to its bank, the terms of which are as follows:
Principal: $12,000,000 due December 31st, Year 5
Semi-Annual Interest Payments each June 30th and December 31st: $360,000
As a result of the company's distress, on January 1st, Year 1 Borrower Inc.promptly renegotiated the terms of its loan as follows:
Principal: $10,000,000 due December 31st, Year 5
Semi-Annual Interest Payments each June 30th and December 31st: $300,000
The market rate of 8% per annum has been unchanged since Borrower took out its initial loan.
Required:
From Borrower Inc.'s perspective, is this a settlement or modification of terms? Explain by showing calculations and providing the journal entry to adjust the loan if necessary.If no entry is required, explain why.
Prepare Borrower Inc.June 30th, Year 1 Interest expense entry.