Reference no: EM132483235
Point 1: It was spring of 2016, and Mary Goodwin, sole shareholder of P&L Oaks (P&L), a national supplier of oak tree varieties to garden supply retailers, had decided to expand P&L's product offering. She planned to carry more exotic trees and shrubs to keep up with the changing demands of retailers. The expansion would require an investment of $1,250,000 for the land, greenhouse construction, inventory infusion, and working capital requirements. Goodwin wanted the new greenhouse to be operational by December 2017 to ensure that the new plants would be ready for the spring planting season.
Point 2: To help finance the expansion, P&L issued 1,250 five-year bonds ($1,000 each) with a coupon rate of 6.5 percent on May 15, 2016. Interest was to be paid semi-annually on November 15 and May 15. On the date of issuance, the prevailing market rate was 7.25 percent.
- On February 1, 2017, market interest rates dropped to 5.75 percent. Goodwin thought it was an opportune time to recall a portion of the outstanding 9.5 percent bonds payable that P&L had issued for its last expansion project (see Exhibit 1). The 9.5 percent bonds payable were callable at 115 at the option of the P&L.
- On February 28, 2017, P&L decided to recall 45 percent of the bonds payable. The 9.5 percent bonds paid semi-annually on June 1 and December 1. The market interest rate had been eight percent when the bonds were issued. On the date of the recall, the market interest rate remained at 5.75 percent.
REQUIRED:
Question 1: Calculate all of the opening balances and record all necessary transactions and adjusting entries dealing with the issuance of bonds and payment of interest for the period April 1, 2016 to March 31, 2017.
EXHIBIT 1: 9.5% Bond Payable Details
Issuance Date: December 1, 2014
Maturity Date: December 1, 2019
Face value (500 bonds): $500,000
Carrying value after December 1, 2015, interest payment date: $525,248
Carrying value at last fiscal year end (March 31, 2016): $523,421
Bond interest payable at last fiscal year end (March 31, 2016): $15,833